The Ways Parents can Assist their Children to Buy a Home
The fall in Sydney house prices is making it easier for parents to help their children to buy their first home. As a child will normally need to demonstrate to a bank or other lender providing mortgage funds that he or she has sufficient savings to proceed with the purchase, what are the most common ways for parents to give their support?
Gift Providing a gift of funds for a deposit is any easy way to give financial support. However, this does not show the lender that the child can save money and such a gift will not be considered as savings by the lender constituting a deposit. And, of course, the moneys given as a gift will not be recoverable.
Loan Guarantee In this case the parents do not have to give any cash up front but instead use the equity in their property to guarantee the amount of the deposit. However, the parents will be legally responsible to pay back the amount guaranteed should their child default on their mortgage. Also, the guarantee needs to be disclosed by the parents if they need to apply for their credit and their credit ratings would be affected if their child defaults.
Co-Purchase This is where the parents (or one of them) purchases the property with their child in agreed shares according to their financial contribution. The child can buy out the parents later to obtain full ownership.The parents would also have to be parties to the mortgage loan and would be responsible for their portion of the mortgage repayments and all other expenses relating to the property. Once again this could affect the flexibility of the parents in terms of their future financial planning.
Deposit Loan A safe option is simply to lend the deposit to the child. A formal loan document should be prepared providing for the payment of some interest and in this way the return of the money is protected while at the same time assisting the child to purchase the property. Also, protection is afforded against any future relationship breakdown of the child denying the partner access to the funds loaned.
April 2019