Homeownership is a significant step for young adults. But, it is becoming more challenging for buyers to save for a deposit, given rising property prices, high interest rates and the increased cost of living.
As a result, the Bank of Mum & Dad has grown as an alternative path to homeownership for young buyers.
Around 40% of first home buyers have had help from the Bank of Mum & Dad, according to research from the Housing Monitor. This is up from just 15% in the 1980s.
It’s clear that this option has become a factor in helping children onto the property ladder.
So, how can you assist your children into homeownership without compromising your own financial security?
Gifting a deposit
One of the most direct ways of helping your children buy a home is by gifting them a deposit.
With the median home value reaching $798,207 in July, according to CoreLogic, a 20% deposit is becoming more difficult to save.
While buyers can circumvent the 20% by paying lender’s mortgage insurance (LMI), this adds to the cost of their monthly repayments (assuming it’s capitalised onto the loan). So, if you can cover the cost of the deposit, your children can purchase their home without needing to add expenses to their mortgage.
But, the gift of a deposit will require evidence of the source, usually in the form of an accompanying letter which confirms that the funds have been provided unconditionally.
There are several ways to structure this process. You can provide the cash as an outright gift, requiring nothing in return. You may choose to offer the money as a loan with no interest or a lower interest rate than your child would have received from a lender. Or, you may ask that you receive a proportional amount of the proceeds of the sale when or if the home is sold.
Regardless of which option you choose, you must have clear documentation stating the terms of the gift or loan.
Signing as a guarantor
A parent or close family member is able to sign as a guarantor on their child’s mortgage. In this case, you will use your property as security for your child’s loan.
Although you are not offering cash towards the purchase, the value of your security can amount to the same as the 20% deposit on your child’s new home. This saves them from paying their own deposit or adding LMI to their mortgage.
If the borrower does not pay their mortgage, the guarantor (you) becomes liable for the outstanding balance. This can involve your property being sold to recover the outstanding debt.
Financial considerations for the Bank of Mum & Dad
While helping your children is a generous thing to do, there are some factors you should consider before making your decision.
First, there may be certain tax considerations, depending on the help you offer. If you give a no-strings-attached gift to your children, there are generally no tax implications for you. But, if you are providing the cash as a loan, you must declare the interest you have earned on that loan to the Australian Taxation Office (ATO), as you can claim a deduction for this.
If you have requested to receive a portion of the proceeds when the home is sold, you will likely need to declare this as capital gains and pay tax on it.
As the security on a family guarantor loan, there are financial considerations. If the borrower defaults on their mortgage repayments, the Bank of Mum & Dad is responsible. If you can’t make the payments for your portion of the loan, the lender may choose to sell the security property that was guaranteeing the loan to repay the debt.
If you want to sell the home that is being used as security for your child’s mortgage, you will likely be required to pay out the guarantee from the proceeds of the sale or have the guarantee moved to the new home you have purchased.
Perhaps one day you would like to access the equity in your mortgage, maybe to buy an investment property or renovate your home. While the guarantee is in place, you may not be able to release as much.
Parents with more than one child who would like to act as guarantors for both must ensure there is enough equity available in their mortgage to guarantee both.
Becoming the Bank of Mum & Dad
Helping your child onto the property ladder is a wonderful step for your family. But, it must be done with careful consideration, proper documentation and adequate financial planning.
Would you like to help your children into homeownership? Shore Financial can help find a solution for you and your family. To discuss your options, call us on 1300 416 700, email us on info@shorefinancial.com.au or fill in this online form.
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