Help your children purchase their property

Rising property prices are making it increasingly difficult for first home buyers to save the deposit required by banks to secure a mortgage.

Coupled with rising property prices, it’s becoming more and more difficult for budding buyers to step onto the property ladder.

There are some solutions – including being a guarantor on your children’s property.
Early last year, the Commonwealth Bank conducted a survey which found 87 per cent of parents would like to help their children purchase a home.

Through a parental guarantee on a mortgage, first home buyers can buy their property sooner as well as avoid extra costs like lenders’ mortgage insurance (LMI).

Lenders’ mortgage insurance is usually required when you borrow more than 80 per cent of the value of a home. To avoid paying this sum, many parents are willing to be a guarantor for their children for 20 per cent of the value of their property.

Consider all issues
Others may choose to be a guarantor for the whole amount of the mortgage. However while this option may benefit your child, there are various associated pitfalls.

No matter how it is marketed, acting as a guarantor is considerably more than a mere formality. It essentially means you become responsible for the loan if your adult child cannot make the repayments.

In this respect, if you’re concerned about your personal financial circumstances, or are yourself leveraged on your mortgage, it may be prudent to investigate other options.
One alternative is to help your child raise the deposit for their home.

Have you thought about co-ownership?
Conversely, you might choose to purchase a property with your child, which would not only give them a leg-up into the housing market but also provide you with an investment property.

In this scenario, you can choose to be tenants-in-common rather than joint tenants, as this will change the way you structure the mortgage (i.e. two individual mortgages for one property). The split also does not have to be 50:50, however the percentage difference of ownership would be reflected in the final payout should you sell the property.

If you do choose this strategy, documentation is a must.

While you may not be squabbling with your child now, for example, who knows what’s around the corner?

Of course, there are some drawbacks to this option as well.

First, your child may not qualify for the first home owners’ grant. Second, you may be liable for capital gains tax when you sell your part of the property, as it is not your primary residence.

Whatever route you decide to take, remember it is essential to document everything and leave nothing to chance.

If you would like to find out more about being a guarantor, or other options available to you as a parent, please don’t hesitate togive me a call.

Finding a great loan
If you don’t want to buy a property together with your child, another strategy that can prove effective is to help cover some of the expenses associated with their home purchase.
While first home buyers can receive some government concessions to help cover costs – for example stamp duty waivers under $500K in NSW – there are other costs, including legal fees conveyancing costs, building inspections, or even furnishing a new home, you can assist with.