If your children are looking to buy a home, there are a number of ways that you can consider giving them a leg up onto the first rung of the property ladder. Usually, first-time buyers need help with one major aspect: the deposit.
With property prices at all-time highs, it can be confronting for young first home buyers to save the amount needed for a minimum deposit – generally 20%. Luckily, there are a number of ways you, as a parent, can do to help your children with the deposit so they can get into the property market early.
1. Providing a cash gift
Firstly, you could consider a cash outlay. If you have enough funds on hand then you could provide the cash gift to make a deposit by declaring the provided funds are gift money for your child hence non-refundable and eliminating the obligations for them to pay back in the future. Your gift money as a deposit could cut out the middleman cost like LMI (Lender’s Mortgage Insurance Fee) and give them the necessary funds. Understandably, not everyone has that sort of money needed to buy a home sitting around as available cash to gift. Some lenders also do require a borrower to show genuine savings to get the loan – often a lump sum provided by another person will not count as genuine savings.
2. Saving for them from childhood
Parents, start teaching your children how to save with a kid’s savings account. Get into the habit of saving – the earlier you start the better. Many banks offer savings accounts specially designed for kids, with goal setting, tracking, and rewards for consistent savings. This well-known but easily forgotten compounding interests magic works over time. By teaching them to set a budget, track spending and make consistent savings, they are already set for control over their funds and cash flow. A proactive approach like this will not only build them savings habits, which will be useful for later home ownership, but should leave them with a sizable deposit by the time they’re ready to purchase their first home.
3. Guarantor loans
Another option is to consider acting as a guarantor for your children. Effectively, your home has a mortgage taken over it by the lender to your child and you act as a form of security for their loan. You may require a certain level of equity in your current property for this to be viable, however, it could allow your child to purchase without a deposit and potentially to borrow a higher amount. LMI can also potentially be reduced for the first home buyer, saving them thousands. You can opt to be a guarantor for a certain amount of the loan, so speak to your broker about the possibilities. However, this option may leave you at risk if your child defaults on their repayments or does not take the required insurances and significant damage occurs to the home. If you have any concerns that they will be unable to be disciplined enough to repay their own mortgage, then you may not necessarily want to commit your own home to the cause.
4. Joint ventures
A joint venture may be one way for parents and their children to enter into a purchase together. While your child may not be able to afford to purchase the entire property on their own and you may not be keen to be a guarantor, you may be able to enter into a form of partnership with them. This way, you can both own a stake in the home and assist them into the responsibility of homeownership. A joint venture is a commercial arrangement between two or more participants who agree to co-operate to achieve a particular objective. Joint ventures cover a wide range of collaborative business arrangements which involve differing degrees of integration and which may be for a fixed or indefinite duration. To understand how this will work for you, you will need to seek independent legal & financial advice.
The downside of a Joint Venture could be that there may be subsequent disagreements over how the home is used and priorities around repairs, maintenance, and renovations. Bills may also be a source of difficulty and unless many different scenarios are discussed upfront then you may face continuous misunderstandings.
If you are not in a position to help out with deposits for your children, you could assist them by paying for some reports or for a buyer’s agent, or for any other assistance during the course of the property purchase journey. It’s worth asking them what help they need most and having a lengthy conversation around what would be best.
The only option that works for everyone is for both you and your children to be honest about your fears and concerns, as well as what you are hoping for as an outcome.
Ensure to have any agreements written up as legal documents in case the worst happens and to ensure that you both know the pros and cons.
Not every situation will suit all families and for those with multiple children you will want to know how assisting the first child looking to purchase may affect your potential to assist their siblings.
Jenice Lee at Finance Star is MFAA approved finance broker and is not your average mortgage broker.
Contact us if you want to find out more about how we can help with your finance options.
FINANCE STAR Credit Representative Number 529071 is authorized under Australian Credit Licence Number 389328.
This article provides general information only and has been prepared without taking into account your objectives, financial situation, or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax, or financial advice and you should always seek professional advice in relation to your individual circumstances.
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