How to help your children into homeownership
With rising property prices and high costs of living, it is becoming harder for young people to achieve homeownership.
But, there are alternative paths, including turning to the Bank of Mum & Dad. According to the Housing Monitor, around 40% of first home buyers have had help from the Bank of Mum & Dad, a considerable increase from the 15% seen in the 1980s.
As parents, there are several ways to contribute to your children’s homeownership journey.
Gifting a deposit
Offering your kids money towards their deposit can significantly impact their home loan and reduce the amount they need to borrow.
If you choose this route, you’ll likely have to provide your children’s lender with a letter confirming the money is a gift provided without any conditions.
But, it is important to note that your children might still be required to have a certain amount of “genuine savings” to put towards the mortgage. Genuine savings is money someone has saved up over time, rather than money that has been gifted, inherited or acquired from selling an asset.
Signing as a guarantor
Another option for parents is to sign as the guarantor on their child’s mortgage, agreeing to be liable if your child defaults on their mortgage repayments.
This does not involve you giving them any money. Instead, you will use equity in your own home as the security for the loan.
Even though you are not providing hard cash, it can amount to your children having a full 20% deposit. This means they won’t be liable to pay lender’s mortgage insurance (LMI), saving them money.
Considerations before becoming the Bank of Mum & Dad.
Before offering to help, there are several aspects to consider, including:
Tax implications
There may be tax implications for you, depending on how you help. Gifting a deposit, as long as it is on a no-strings-attached basis, generally won’t have any tax liability. But, if you’ve requested repayment or agreed to receive your money back when they sell the home, you may have tax obligations.
Financial consequences
Financial considerations are another aspect to consider. As a guarantor, you become liable if they default. But if you can’t pay, the lender may choose to sell the asset you are using as security. This could be your own home.
Additionally, acting as a guarantor can impact your ability to borrow money in the future. Lenders may view your existing obligations as a financial risk, potentially limiting your borrowing capacity.
While helping your children become homeowners can be a rewarding experience, it's essential to approach the situation with careful consideration. By understanding the various options and potential risks, you can make informed decisions that benefit both you and your children.
It may be helpful to speak to a mortgage broker about your options. Your broker will guide you and your children through the process of applying for and securing a home loan that suits your and their needs.
Looking to help your children into homeownership? As an award-winning mortgage broker in Sydney with over 390 five-star Google reviews, Eventus Financial can help. Schedule a no-obligation consultation with Alex to get started.