You see your kids struggling to raise the deposit needed to buy a property, but you’re not sure what’s the best way to help.
If you give them a gift of money, will lenders accept this as a deposit? Is going guarantor too risky? What about if you buy a house together - will there be complications down the track when it’s time to sell? Here we look at the pros and cons for three standard options.
A gift of cash
For lenders to accept a cash gift as a home loan deposit, there will be a wait involved. Your child will usually have to leave the lump sum sitting in their bank account for several months before making a home loan application. Policies vary between lenders and may depend on how much of the deposit you are gifting, but a typical wait is between three to six months.
By itself, a cash gift may not get your child’s home loan application over the line. Lenders want to see that borrowers can support themselves and keep up with home loan repayments once they have the property. They may look for a stable source of income as well as evidence of a good savings history. In most situations, borrowers will need a minimum of 5% genuine savings to qualify for a loan.
From the parent’s perspective, giving money is a simple, no strings attached way to help out, provided you are happy to give up your right to a future claim on the money. Your lender may even ask you to sign a ‘gift letter’ or statutory declaration stating you have given the money unconditionally without the expectation that it will be repaid.
As part of reconciling to the fact that this money won’t come back, you should consider possible future scenarios. For example, if your child’s relationship breaks down, you will be faced with the prospect that their partner may end up with half of the property that you’ve helped fund.
Using your home to go guarantor
Rather than giving cash, you can use the equity in your property as security. Known as a guarantor loan (or a family pledge loan), it eliminates the need for your child to raise a deposit because you are putting yourself up as the responsible party. If your child defaults, you remain guarantor for the value of the loan.
The good news is that you can lessen this responsibility by limiting the guarantee. For example, you could use the equity in your home as security for only 20% of the property. By doing so, you aren’t locked into the loan indefinitely. Instead, you can request to be released from the guarantee once the property has increased in value or your child has paid off that portion of the loan.
Lenders don’t automatically accept parents as guarantors. Policy varies from lender to lender, but you are less likely to be suitable as a guarantor if you’re retired (exceptions are possible if you are self-funded with significant assets). Another obstacle might be if you are still paying off your mortgage. Lenders prefer guarantors to own their home outright but may make an exception if the guarantor’s debt and the guaranteed debt doesn’t exceed a certain percentage.
Likewise, first-time borrowers will need to demonstrate their ability to service the debt before lenders agree to the guarantor loan.
Buying in partnership
Jointly owning a property with your child is another way to give them a foot up the property ladder. When you co-own a home, you share the responsibility for loan repayments, even though you may be living elsewhere.
It’s vital to find out the best way to go about this arrangement to suit your circumstance. Tenants-in-common is a popular choice as the shares of the property don’t have to be equal so that yours can be passed on according to the terms of your will.
Under a joint tenancy arrangement, ownership of the property is split in half, and your share of the property is automatically passed to the other joint tenant regardless of your will.
Co-owning a home is a partnership fraught with potential conflict, so be sure to set the ground rules in advance. Issues to put in writing include the length of the investment, the exit plan and an agreement about what to do if one party wants to exit and the other doesn’t.
Did you know that helping your kids buy a home might jeopardise your future borrowing power? Lenders assess liability for the entirety of the property debt, regardless of the size of your share.
For help with any issues raised in this blog, seek the specialist advice of an experienced Yellow Brick Road mortgage broker.