It is beneficial to help your child get a first-time home loan. You can earn about 3% over the long term. The child will save money on interest rates, closing costs, and Private Mortgage Insurance. Parents need to educate themselves about how they can help their children with the initial deposit for a home. Parents, regardless of whether they have experience in home-buying, must remain aware so as not to risk their financial situation.
How much parental help is needed?
According to a study by Digital Finance Analytics, it was discovered that 54% of first-time buyers rely on their parents for their first home. This dependence is due to the affordability of housing in Australia. The 20% deposit to get the home loan approval, along with the increasing rate of mortgage payments, is causing an obstacle for first-time buyers. They are unable to cross this hurdle without outside financial assistance.
The question then is: “How can parents assist their children in obtaining the home of the dreams they desire without experiencing financial hardship over time?” It is more important to ask, “How can parents help their children while avoiding the risks?”
What are the risks involved?
You are only seeing one side of the story if you think that the rise in house prices since 2009 is only affecting young buyers. To support their children in their endeavors to buy a home, parents either withdraw the amount from their super fund or take out another loan on their home equity. Parents are put under financial stress in both situations at a time when they should be saving money for emergencies and health. The worst case scenario is that parents cannot re-obtain money. In this situation, they are left helpless and in a stranded position.
Many parents lie to lenders, claiming that the money offered to their children is a gift. What parents don’t realize is that the money would not be required to be returned if it was a gift. In such cases, parents must also sign a statutory statement. This makes it harder for them to claim later that the money was actually a loan.
The issue parents face when they loan money to their children is how to get them back. When the loan isn’t paid back, it can create resentment.
If your child defaults on payments, you will have to take the necessary steps to repossess them. No parent wants to do this.
What Parents can do to help
When giving financial assistance to their children, parents can reduce the risk by taking preventative measures. Here are some solutions to the above situations.
#1: Become a guarantor
You can help your child by becoming a guarantor. The equity in your home can be used to secure your child’s mortgage. Be careful and make sure that your child is capable of repaying the loan. Otherwise, you will be obligated to pay back the entire amount plus any fees, charges, and interest.
As a parent, you can be a guarantor to your child to help them gain a foothold in the property market. However, it is important to give this decision some serious consideration and to consult an expert in order to assess any potential risks. You could co-guarantee the loan of your child as a measure of safety. This means you will only be responsible for a part of the amount. You can limit your guarantee to 20% of the price, saving both your child and yourself the cost of Lender’s Mortgage Insurance.
Second, you can gift the down payment.
If money is given to someone in Australia solely to help that person, there is no tax on the gift. If you want to give your children the money they need for a 20% deposit on a home but don’t expect it back, you are welcome to do so. If the money is used to pay for a service or generate income, it will not be considered as a gift.
Parents should first determine if this decision will have any impact on them, particularly during retirement. Speak to a financial adviser who can advise you on how to secure your financial security.
Third, allow your child to live at home.
You can also help your child save money for their own home if you are unable to give a generous gift or decide that guaranteeing the purchase is not a good idea. You can do this by allowing your child to live with you until they save enough money for their initial deposit. So they don’t have to pay for rent or other expenses. Ask your children to split the utility bills with you as long as you have them there. This will relieve you of financial burden.
Co-owning a Property is #4
Parents can also consider co-owning a property with their children to assist their children in buying a home. Both parent and child will be able to share the costs of paying back the loan.
This option also comes with risks. Mario Borg, a financial strategist based in Melbourne, said that “anything that involves partnership comes with risk.” This is because the child could have a partner who has their own financial goals for the future. These plans may also change. Changes in events could result in decisions made that would be more beneficial to the parents or co-investors. This can lead to bitterness between the partners. If you want to get a property with your child, make sure that you have a plan in place, consult a financial advisor, and document all agreements beforehand. There is no sense in crying over spilled milk.
#5 Purchase the property yourself
This option is best for wealthy parents. Why not buy a house for your child instead of giving them money? This is a great option for parents who don’t feel their children are financially ready to become homeowners. This option has many tax implications, both for the children and parents. Before making a decision, seek legal advice. This can help avoid future problems in the event of an unexpected death or family issues.
The conclusion of the article is:
A parent’s experience of helping their child purchase a first home can be a rewarding one. It can be a good financial experience for parents who are close to retirement. In this case, money can make or break a relationship. Choose expert advice over your emotions to ensure a smooth life.