As property prices continue to rise, buying a first home can feel like a daunting task for many young Australians. For parents, the desire to help their children achieve this milestone is natural, but it’s essential to approach it with careful planning. Here’s how you can assist your children in making their homeownership dream a reality.
Gifted Deposit
One of the most common ways parents can help is by providing a cash gift to assist increasing their children’s deposit. This involves giving your child a lump sum of money to boost their savings and potentially avoiding Lenders Mortgage Insurance LMI). It can also improve their borrowing power providing the funds are a gift. Generally the lender requires a statutory declaration confirming the funds are not repayable. If treated as a loan the repayment will need to be factored into their servicing and will reduce their borrowing capacity.
Family Guarantee
A family guarantee allows parents to use equity in their own property to satisfy the lenders minimum deposit requirements. This strategy can be particularly helpful if your child has strong income but a small deposit. Most banks offer this style of product however we have some alternate ways of achieving the same outcome. However, this option has some risk and you are liable for a portion of the debt until its either repaid or refinanced when your children’s equity has improved.
Servicing Guarantee
A servicing guarantee is another option where you can help your child qualify for a home loan by agreeing to allow your income to be included in the banks servicing calculations. This option has become very limited with most banks not offering this product however if certain criteria are met we have options available. Both family guarantees and servicing guarantees come with risk as you are legally involved in the loan process jointly with your child.
Joint Purchase or Co-Ownership
Another way to assist is by purchasing the property together with your child or by encouraging your children to combine their resources and purchase together. Careful planning is required as joint scenarios can impact the ability of one child to borrow independently in the future. It is even more complicated if one child wishes to live in the property whilst the other doesn’t as there is a mix of non-deductible and tax-deductible uses.
Educating and Advising
Beyond financial support, its important to educate your children from a young age about money. They should be encouraged to save a portion of their income from an early age and basic principles about housing, budgeting for ongoing costs and borrowing money.
Conclusion
Helping your children buy their first home can be a rewarding experience for both parent and child, but it requires careful consideration of the financial and legal risks. Whether it’s a gifted deposit, family guarantee, servicing guarantee, joint purchase, or simply offering guidance, your support can make a significant difference in their journey.
Contact WMS Finance Broking if any of the above points are of interest to you.
