Helping your child with getting a home loan for buying a house for the first time comes with its benefits like earning about 3% in long-term. Your child, on the other hand, will be able to save on closing costs, Private Mortgage Insurance (PMI), and interest rates. The number of young home buyers in the Australian real estate market is growing, and parents require to be more educated about helping them with the required initial deposit on the home. Irrespective of having had experience with home buying, parents must still stay aware, so that they do not risk their own financial status while doing so.
How much Parental Help?
As per a research by Digital Finance Analytics, it was found that over 54% of young first-time homebuyers rely on their parents to buy their first home. The reason for this dependability lies in the issue of housing affordability in Australia. The 20% deposit to get the home loan approved along with the growing rate of mortgage repayments is causing a hurdle for young first-time homebuyers, which they are unable to cross without external financial assistance.
So, the question is, “How can parents help their children obtain the home of their dreams without falling into a financial distress over time?”. The more critical question, however, is “How can parents dodge the risks involved, while they help their children?” To answer both questions and come up with a good solution let us analyze the risks involved first.
The Risks Involved
If you thought that only young buyers were the ones affected by the rising house prices ever since the Global Financial crisis of 2009, then you are looking at only one side of the coin. You are forgetting the fact that to support their children’s endeavors of buying a home, parents are either withdrawing the amount from their super funds or taking up another loan against their home’s equity. In both cases, parents fall under great financial pressure at a time when they are supposed to be saving for health and other emergencies. A worst-case scenario is not being able to re-obtain the money, in which circumstances, parents are left in a helpless and stranded situation.
Again, there are many parents who are lying to lenders by saying that the money they are offering to their child is a gift. However, what parents do not understand is that if the money is a gift, it would not have to be returned. Parents also have to sign a statutory declaration in such cases, which later makes it difficult for them to turn back and say the money was a loan.
Other than that, the issue for parents in loaning money is getting their kids to pay it back. This creates a lot of resentment and emotional issues that accumulates when the loan is not paid back.
Even as a guarantor, if your child makes a default on the payments, then you have to foreclose on them yourself and no parent is ready to do that.
How Parents can help
Parents can always lower the risks involved while helping their children buy a home by opting for preventive steps when giving out financial help. Here are some ways to tackle the situations mentioned above.
#1 Become a Guarantor
The first option that you can choose to help your child buy a home is to become his/her guarantor. This way the equity in your property can be used as additional security for your child’s loan. Nevertheless, tread carefully and ensure that is capable of making the repayments, otherwise, you would be bound to pay the entire loan back along with any additional fees, charges, and interest.
Becoming a guarantor for your child can help them get a foothold in the property market, yet give this decision a serious thought and talk to an expert to weigh out any risks involved. As a safety measure, you could also choose to co-guarantee your child’s loan, which means that you only guarantee the payment of a portion of the loan amount. You can also opt to limit the guarantee to only 20% of the purchase price as well, which can cover both the loan’s required deposit amount and save your child from the expense for Lender’s Mortgage Insurance (LMI) fees.
#2 Gifting the down payment
In Australia, if money is gifted to someone, purely with the desire to help them, then there is no gift tax levied on it. So, if you feel that you can gift your children money to cover at least the 20% deposit required for getting a home loan approved, without wanting it back, then you can surely go ahead with this option. The amount given will however not be considered a gift if it involves getting a service done or helps in producing income.
To secure your position here too, it is recommended that parents first analyze whether this decision has any impact on their own financial security, especially during the retirement period. Talk to a financial advisor, who will advise you on steps to secure your financial security first.
#3 Allow your Child to Live at Home
If you cannot help with a gift amount or decide that guaranteeing your child is not a wise option, then you can help them to save for their home instead. One way to do so is by allowing them to live in your home till they have saved enough for the initial deposit. This way they do not have to spend on rent and other amenities. You can ask your children to share the bills for utilities with you for as long as they are there so that you are not financially burdened.
#4 Co-own a Property
Another option that parents can consider to help their children buy a home is to co-own a property together with their children. This way both parent and child can share the expenses of repaying the loan.
Yet, this option too comes with its own risks. As stated by Mario Borg, Melbourne-based financial strategist, “Anything that involves a partnership usually came with risks.” The first and foremost reason being that the child might have a partner, who would have their own financial plans for the future, which could also take a 360-degree turn. The change of events might lead to decisions that are suitable for the parents, the co-investors, which could lead to bitterness in relationships. So, if you are going to partner up with your child and get a property together, first chalk out a game plan, involve a financial advisor and document your agreements well beforehand. After all, there is no point in crying over spilled milk.
#5 Buy the Property Yourself
If you are a wealthy parent, this option is for you. Instead of gifting the money, why not just purchase a home for the child and gift it to them? It’s a good option for parents whose children aren’t prepared financially to take up homeownership. Nevertheless, this option involves many tax implications for both parties involved, the parents and children. Hence, before proceeding ahead with the decision, ensure to take good legal advice, which can help you avoid problems in case of unexpected death or other family problems in future.
It can be an enriching experience for a parent to help their child buy a home for the first time. Yet, it can also be a bad financial experience, especially for the parents, most of who are nearing the retirement age. Money makes and breaks relations, which is true in this case as well. So, whatever your decision as a parent may be, always choose expert advice over emotions so that you can have a smooth sailing life.