Helping your kids get on the property ladder
These days more and more kids are relying on their parents to help them buy their first home or investment. And most parents are happy to help if they can. So as a parent, what options do you actually have?
With property prices climbing year on year, it’s not always that easy for the next generation to jump onto the property ladder. It’s no wonder then that these days many mums and dads are willing to put their hands in their own pockets to help their kids kick-start their future. Some of the options could be:
Provide cash for a deposit
If you are in a position to do so, you could provide all or part of the money to put towards a deposit. If you don’t have cash but have equity in your property, you could refinance your property to pull out the cash although you will now have repayments to make on this new loan. Providing a deposit can be made as a non-repayable gift or as a repayable loan. If it’s provided as a loan, some lenders may require a formal contract to be signed. If you are close to retirement, also bear in mind there are social security consequences with gifting that need to be considered.
Buy the property jointly
In this scenario, you buy the home as ‘tenants in common’ with your child. This allows you and your child to treat your share in the property separately, and to split ownership however you wish – for example, 40% ownership to your child, 60% ownership to you.
Act as guarantor
If you have equity in your own property (ies), you may be able to use this as security for your child’s purchase. Your child will still need to borrow the full amount, but may avoid lenders mortgage insurance if the sum you put forward as security allows their loan-to-value ratio to come down to 80% or less. With this option, you do not have to physically dip into your pocket at all – you are simply just making a promise to the bank that you will support the loan (in full or in part) if your child defaults. While you may think this is unlikely, you must be prepared for the risk of this outcome as it does happen and shouldn’t be taken lightly. Once your child’s house has grown enough in value, you will be able to be released from their loan.
If you don’t have the financial capacity to help your children, don’t be dejected. The best thing you can do for your child is to help them become financially savvy themselves as early as possible. There are many ways to do this – for example, if you are able to have them stay at home longer, help them to save through paying you board which goes into an interest-bearing account in their name and then put towards a house deposit when they are ready. Learning to save, recognising the importance of long-term goals, and understanding the fundamentals of investing in property wisely is worth just as much, if not more, than money itself.
If you are looking at assisting your child financially with the purchase of a property, speak to a Momentum Wealth broker. Different lenders have varying requirements, and with the recently implemented NCCP legislation, your broker can advise the best options that are suitable for you.