5 Ways to Help Your Kids Buy Property
It’s no secret that it’s tough for young adults to break into the property market. As a parent of a young adult who’d like to buy property and are unable to, you may be able to give a helping hand. But how can you do this?
We’ve listed five ways you can help in realising your kids’ dream.
1. Parent-to-child loan
A parent-to-child loan is when a parent formally lends their child money in the form of a legally binding agreement administered by an independent third party. Both parties agree to terms before the start of the loan, which include; repayment amounts, a schedule and a process to manage a default in repayments.
Parents can set generous terms for their child, but their savings, assets and credit rating are somewhat protected as they’re not the borrower. However, there are legal implications for the child if they have a relationship that breaks down; the spouse could claim some of the loan proceeds. A parent-to-child loan may also affect the services a bank may offer. Both parties also need to be aware of tax considerations.
2. Family guarantee
If the child does not have enough security to put towards the mortgage, the parents may be able to provide a family guarantee. Also known as a guarantor loan, this is where parents can use some of the equity in their own home as part of the security. For example, a parent may cover 20% of the purchase price, which is secured against their own home, while the new property would secure the other 80%.
Parents can make it a temporary arrangement until the child has paid down the loan to an acceptable level. As guarantor, parents can choose how much security they’d like to offer. However, their assets are potentially at risk if the child defaults on their loan.
3. Become a co-applicant
A parent can help their child secure a loan by signing on as a co-applicant. This means that both parent and child are equally responsible for making repayments. The lender will then consider the parent's assets, liabilities and income in a borrowers assessment.
In this way, the child can obtain a loan even with a low income. However, if the child stops, or is unable to, make repayments, the parents are responsible for making them. If neither party can make repayments, both parties credit ratings will be affected and in a worst-case scenario, there’s a potential foreclosure by the bank.
When a parent gives money to their child without expecting it to be repaid, it’s considered a gift. The parents may need to sign a statement to say that it’s a gift, not a loan. The great thing about this option is that the parents can provide financial help with possibly no legal, tax or financial implications.
However, if the child has a partner or spouse with whom the relationship breaks down, the former partner could claim part of the property.
5. Assistance in kind
If the parents are risk-averse, they might consider assisting in kind. That is, covering some of the expenses that come along with buying a property. Parents could choose to pay for services such as; property surveys, conveyancing fees or stamp duty. The parents can thus give their child practical assistance.
However, the amount they may want to pay could end up being more than what the child spends. The parents need to make sure they are well informed about their options when giving or lending money to their child, so they remain in the best position to help, while also minimising the risk to themselves.
At Select, we make finance simple. Contact us today on (08) 9417 3399 to discuss the right loan structure for your family.