Have you been watching your child struggle to save for a home deposit and wondered how you can help them?
Well, you’re definitely not alone. It’s a question we get asked here on the daily, which is no surprise with rising house prices and unemployment rates making it more and more difficult for first home buyers to enter the market.
So what are your options as a parent?
You have a few different options available depending on your financial situation, and what risks you feel comfortable taking.
One option is to become your child’s guarantor. This means you can use your own home as security for up to 20% of your child’s total home loan borrowings or you can secure a portion of the loan with a Term Deposit. Although lending criteria changes from lender to lender.
There’s obviously both pros and cons to becoming your child’s guarantor. Some pros include:
- your child may be able to buy a higher-value property with a small deposit thanks to your guarantee.
- Your child won’t have to pay costly mortgage insurance (usually required when borrowing greater than 80% of the purchase price).
- When sufficient equity has built up in the property, you can be removed as a guarantor from the loan.
But there are some risks involved, such as:
- You might be limited on how much you can borrow in the future as most lenders will include your ‘guarantee’ as a debt when determining how much to lend you. It may also limit your flexibility to sell your own home (if you’re still guarantor on your child’s loan).
- If there’s a drop in your child’s house value, it may take longer for you to be released from the loan.
- If the borrower (your child) defaults on their repayments, it will be your responsibility to cover their repayments.
Not all lenders will automatically accept a parent (you) as guarantor - policy varies from lender to lender. And most lenders will want you to own your home outright but may make exceptions if your debt and the guaranteed debt is under a certain percentage. They may also want to see that your child can save and be responsible for their money, before agreeing to the loan.
Giving a cash gift
Not everyone will be in a position to hand out a lump sum, but if you can, it’s probably the most simple and straight-forward way to help your child buy a home.
However, 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 cash sitting in their bank account for three to six months before they apply for a home loan. This is to show they’re not reckless with their money.
A cash gift may not always guarantee a loan by itself. Some lenders may also want to see that your child can support themselves and make repayments. They may look for a steady income as well as evidence of a good savings history. In most cases, your child will need a minimum of 5% genuine savings to qualify for a home loan.
The biggest drawback for you is that you will have no right to reclaim this money at a later date. And some lenders may even ask you to sign a letter stating you have given the money unconditionally.
Many lenders may not offer this option at all, unless you’re going to be generating some kind of income from this arrangement or living in the property together. However, if it’s something you are interested in, you can always chat to your lender about available loan options.
Things to think about
It’s always a good idea to chat with financial, legal and tax advisors before making any decisions, so that you can determine the best approach and to go over questions like:
- Will it put pressure on my finances?
- What will the tax implications be?
- What if my child’s relationship breaks down?
- What if my child becomes ill or loses their job?
What option is best for you?
Whether you become your child’s guarantor, give them a cash gift or buy a property in partnership – it’s important to seek out professional legal and financial advice before entering an arrangement.
Our lending experts are also available to help talk through your options. Make an appointment with one of our friendly Mobile Lending Managers, who can contact you by phone, email, video call or home visit at a time that suits you. Call us on (08) 8202 7777 or visit us at 400 King William Street, Adelaide between 8am – 5.30pm weekdays or 8am – 2pm Saturdays. We’re here to help!
This article is intended as general information only and has been prepared without taking into account the personal financial situation, objectives or needs of the reader. Before acting on this information, you should consider its appropriateness, having regard to your objectives, financial situation and needs.