Guiding Your Children Through Home Purchases: Essential Steps
To navigate the daunting process of helping your child secure their first home, consider these creative ways to provide financial assistance beyond the deposit:
- Security Guarantee (Guarantor Loans): Offer your family home as a guarantee to safeguard your child's mortgage. Although parents are not responsible for regular payments, the lender has additional collateral, potentially waiving the need for mortgage insurance and reducing the deposit requirement. Carefully structure this guarantee to limit your potential financial liability to the deposit shortfall amount.
- Cash Held as Term Deposit: Place funds in a term deposit, securing the mortgage while retaining control and earning interest. This balances between gifting funds outright and serving as a guarantor.
- Co-Ownership or Buying Together: List parents as co-owners on the property title, increasing borrowing power and potentially streamlining mortgage approval. However, this arrangement carries tax and estate planning implications, such as constraints on eligible capital gains tax exemptions. Seek professional advice before proceeding.
- Parents Buy and Rent to Children: Purchase the home and rent it to your children. The children pay the mortgage; parents retain ownership until potentially passing the property as inheritance. This strategy works best with a clear estate plan in place to address tax and succession matters.
- Matching Savings: Match your children's savings contributions at a predetermined ratio, accelerating the accumulation of deposits or other upfront costs.
- Borrowing the Deposit: In some cases, parents can lend or borrow funds to cover the deposit. Ensure the loan terms satisfy the mortgage lender's conditions, including assessing the borrower's monthly outgoings and repayment ability.
While each option comes with different legal and financial implications, consulting with professionals can help ensure a suitable arrangement for both parties. Keep in mind liability exposure, ownership and tax ramifications, control of funds, estate planning considerations, and lender requirements. Help your child secure a stable footing on the property ladder with careful planning and expert guidance.
- By offering your real-estate property as collateral for a guarantor loan, you can help your child secure a lower deposit for their first home, potentially eliminating the need for mortgage insurance.
- To strike a balance between gifting funds and serving as a guarantor, you could place savings in a term deposit that can later be used towards your child's housing-market investment, earning interest along the way.
- Working together with your child to co-own an property in the real-estate market can increase borrowing power and simplify mortgage approval; however, it comes with implications for personal-finance, such as tax and estate planning considerations.
