As the price of property continues to rise, many parents are stepping in to help their children buy their first home. For some first home buyers, without that help, securing a home would be simply impossible. Whether it’s through gifting the deposit, lending them the money, providing a guarantee, or being a joint borrower, there are a number of considerations to take into account. We take a closer look at just what you need to think about when deciding to help your kids buy a home.
Sort your own finances out
Helping your children buy their own home will largely depend on the state of your own finances. There’s no point lending them the money if it’s going to leave you short in your retirement. Talk to a financial adviser before you make any decisions, to determine whether or not you can actually afford to help out.
A work ethic
It’s widely believed that people who haven’t had to work for their deposit are more likely to fall behind in mortgage payments. Consider how your kind-heartedness could impact on your children’s work ethic and responsibility towards repaying their loan. Learning to budget and placing value in the effort required to secure their own home are valuable life lessons.
A breakdown in relationships
Consult with a lawyer to properly document the loan you’re providing. In the case of a relationship split, your child’s partner may be entitled to half of your gift. Consider adding in a clause that says the loan is repayable on demand, or register a caveat over the property if you feel this is appropriate. That way your loan can be called up if your child separates. By carefully documenting all transactions, you’ll help avoid family disputes at a later stage.
Can they afford it?
If you are helping out with a gift or a loan of the deposit towards a new home, check that your kids can actually afford the mortgage repayments. While the property you help buy could be rented out or sold at a later stage if repayments become difficult, not every parent wants to be a landlord and the property market may shift leaving you with a property you’re unable to sell.
Before making any decisions, it’s important you carefully weigh up where your children are headed in their professional and personal life. How secure is their job and how do their future prospects look? Are they living beyond their means already, and will they have enough to cover the repayments each month? Are they likely to move in the next year or two, which may not be enough time for the property’s value to grow in order to recover purchase costs?
Are their expectations too high?
If you are providing the deposit to help your kids purchase their first home, they would still be responsible for all of the mortgage repayments. That may mean they’ll need to lower their expectations; that four-bedroom villa in a top suburb is out of reach, and a more modest two-bedroom home is an adequate first step on the property ladder.
How you can help
Helping your children buy their own home can be rewarding for both parents and children. But it’s not something that should be done lightly. It’s vital you seek advice around the legal, tax, family and financial side of helping out. If you are considering helping your kids buy their own home, either with a gift, a loan, as guarantor, or by extending your own mortgage, talk to our mortgage advisers first about your options.
Call or email me to find out the most effective strategy to get a premium price for your property.