Over the past few years, it’s become more common for parents to help their children purchase a property. As property prices have risen sharply, particularly in places like Sydney and Melbourne, entry into the property market is not as easy as it was a generation ago.
More and more parents are helping their children get a foot into the market, given that prices continue to rise each year. Here are some ways parents can help their children get that first property.
A Guarantor Loan
A guarantor loan is a way that a close family member (normally parents) can help provide a deposit for a home loan.
Generally speaking, lenders like to see that a borrower is able to come up with a 20% deposit on the property they wish to purchase. This shows the lender, that they are a borrower that can manage money, while it also gives the lender some security in the event the borrower is unable to meet their repayments and they have to step in.
A guarantor loan works by having a parent put up equity in their own property (normally the family home) as a deposit. This means the borrower can potentially get a loan and avoid things like Lenders Mortgage Insurance (LMI).
There are some considerations with this type of strategy. Significantly, the parent’s property is at risk in the event the children can’t meet the repayments. A guarantor loan also means you are effectively borrowing nearly 100% of the property’s value.
The ability to get a loan is still dependent on the borrower’s ability to service the loan, based on their current income and expenditure.
In many instances, parents will simply give their children a sum of money to use as a down payment on their first property.
The main issue with this is a lender will likely still want to see that a borrower has some kind of genuine savings. Genuine savings is really just money a borrower has saved up over a period of time. Ideally, this would be the 20% deposit that they had been working towards saving.
Lenders will typically want to see that these funds have been sitting in a bank account for some period of time. The policy with genuine savings and gifts varies between lenders and it’s always advisable to speak with a mortgage broker about your personal situation.
While not as common, it is possible for parents and children to own a property together.
Before entering into this type of arrangement it’s advisable to speak to an accountant who can direct you on the correct tax structure to use. This is due to the capital gains implications that might not be present with just a single property owner or a couple.
Another consideration with property co-ownership is how the arrangement works on a practical level. Who pays what and when? If the children are living in the property, are they going to be paying rent to the parents and how much? These are things that you will need to outline, even before you begin searching for a suitable property.
The other consideration will be how do you actually finance the property? If both the parents and children have regular incomes to service any debts, then it might not be an issue. However, if one party does not have a regular income – for example, if the parents are retired or the children are students – then this might impact their ability to borrow.