With the current housing affordability crisis, many parents are wondering how they can best help their children buy their first home when they can’t even afford the deposit. So, what are some of the options?
Guarantor Loans – Normally, a lender will require that your child have a 20% deposit to purchase a home in order to avoid the added cost of mortgage insurance. As many young people don’t have the 20% deposit, a guarantor loan can be used to satisfy this condition.
Under a guarantor loan the parent provides the the balance of the 20% deposit required by guaranteeing payment of the home loan by their child and providing security over the parent’s home. If the child defaults under the home loan, the parent is then responsible.
A Gift – Some parents may wish to give their child the sum of money required to make up the deposit with no strings attached. This is a personal decision but may not encourage the child to be financially responsible when the money was so easily obtained.
A Loan – Rather than an all out gift some parents might be more comfortable lending the money for the deposit to their child which encourages the child to be more financially responsible. Also, this offers the parent a level of protection knowing that the money has to be repaid at some point.
A Loan with Security – A loan to a child can be secured by a mortgage over the property purchased by the child. This offers the highest level of protection to the parent and can even allow the parent to sell the property to recover the money owing under the loan if necessary. It also protects the money lent if the child buys the property with a domestic partner and the relationship breaks up leading to a split up of their assets.
Co-Purchase – A further option is for a parent to buy the property with the child and obtain an interest in the property equal to the amount that the parent puts toward the deposit. For instance, if the parent provides 10% of the purchase price then the parent gets a 10% interest in the property.
Of course, there are pros and cons to any of these options and legal advice should always be obtained before proceeding.
December 2024