There are many kids in Australia who have treated their parents as a ‘bank’ as they have grown up. Whether it was getting the newest game or latest technology before they had saved enough pocket money, or even as big as asking for assistance to buy a car in their late teens.
But these days with the cost of housing many kids are seeking much larger withdrawals and assistance from the ‘Bank of Mum & Dad’ to help them get into property ownership.
Lets face it. It is not easy to save the money for a deposit on a house, and then there are the added purchase costs such as Stamp Duty and Transfer fees that can quickly mount up. Not to mention Lenders Mortgage Insurance if you haven’t saved enough deposit (What is Lenders Mortgage Insurance?).
So how can Mum & Dad help their kids get into property ownership? There are several avenues that can be considered.
Gift / lend an amount of money
This option effectively gives their children at least some of the money for a deposit, whether it be a small amount or significant amount of the funds required. This can either be to meet the deposit requirement or reduce the loan amount to a level that is affordable.
However you should seek guidance from an experienced Finance Broker or credit adviser before finalising any agreement. If the funds are a loan, then the lender will take the repayment of this debt into account in assessing the maximum bank loan that is affordable.
If the funds are a “gift”, then lender is likely to require a Statutory Declaration, or similar, confirming that the funds are not repayable. So if ‘mum and dad’ ever want the money back, particularly in a shorter time frame, then it may be difficult to do so without the sale of an asset.
A Family Guarantee
This option is becoming more and more popular. In basic terms this option sees the parents provide a mortgage over the surplus equity in their own home (or an investment property) as a deposit, instead of the kids providing a cash deposit.
The kids still need to demonstrate that they can afford and repay the lenders loan, but this option can potentially fund the purchase price plus fees and avoid Lenders Mortgage insurance. This is particularly useful if the kids have strong income but are yet to have the time to save a big enough deposit.
In fact, depending on the lender, this form of guarantee can potentially be provided by any close family member (i.e. grand parent, sibling etc).
However each lender is different on their requirements for this type of loan, and not all lenders will offer this type of facility, or limit the level of guarantee required. A Finance Broker should therefore be consulted to assess and explain the option s available and the impact should the parents require their guarantee to be discharged in the short term.
There is also some risks to parents in providing a guarantee. For example if the kids don’t repay the loan they may be called upon to remedy any arrears. For this reason all lenders will recommend that independent legal advice is sought, and in fact some will make this a requirement of the loan.
Support their kids at home why they buy an Investment Property
This is an option that is also becoming more prevalent. Basically the kids buy a property that they would like to live in eventually, but initially live at home on preferential terms (i.e low board) and lease the property out to tenants. The rent therefore assists in meeting loan repayments.
The kids effectively have tenants helping them get into the property market, as after taking into account rental income, their borrowing capacity can be improved. In fact with negative gearing benefits the financial benefits can b e quite significant.
But again, up front professional advice should be sort from accountants, financial planners and finance brokers so that all aspects (i.e. potential capital gains impact) are considered.
To get into the property market can be difficult. But there are many ways that parents can help their kids get a foothold and make the journey a little easier, if they have the capacity to.
Your local Finance Broker can provide assistance in working through the options on offer and help you establish what may suit your personal circumstances.
So, if you are a potential first home buyer, how nice have you been to your parents?