As property prices continue to rise, it’s becoming increasingly difficult for first home buyers to break into the property market.
It’s understandable that parents want to help out financially.
But what is the best way to assist your child to secure their first home loan?
Do you ‘gift’ the funds, with the expectation they will be paid back? Or do you follow the safer route of providing a family equity guarantee?
Smartline Personal Mortgage Advisers Executive Director Joe Sirianni says parents need to be cautious about confirming in writing that funds are a gift, if there’s an expectation that they will be paid back.
“It’s dangerous and dishonest to advise a lender that funds provided to your child are a gift, if in fact you want that money repaid at some stage,” Sirianni says.
Using written confirmation that funds are a gift as a way to ‘get around’ the bank’s lending criteria can backfire.
Take the instance of a child in a long-term de-facto relationship. If the couple split up, the house is still considered a joint asset and the partner could argue that there’s written confirmation that the funds are a gift and not repayable.
Sirianni says the partner would be well within their rights to claim their share of the equity that exists in the property.
“Parents could find that a large percentage of the funds they provided to their child for their future is now in the hands of the child’s ex-partner,” Sirianni says.
Family equity loan
A family equity loan is where the parents, or in some cases, the grandparents, sibling or relatives, use some of the equity in their home to guarantee the child’s home loan.
The guarantee can save your child thousands of dollars in Lenders Mortgage Insurance – payable to all loans that exceed 80% of the value of the property.
“It’s a much more formal and transparent arrangement which still allows the child to secure a home loan without the risk of potentially losing their parents’ funds in the future.”
Go figure: Is your home deposit under 20%?
Being a guarantor
Going guarantor for your child can save them thousands of dollars in LMI.
If you become the guarantor of a property, you are linked to the home loan, but are not required to make any repayments. The guarantee you make can be limited to a specific amount, and the lender will take a mortgage out over the guarantor’s property to the value specified.
In most cases if your child defaults on the loan, you will be held liable for the amount specified in the guarantee.
If you or a family member is considering this type of loan, first consider the Loan to Valuation Ratio (LVR) of the interested property. This is the proportion of money you borrow compared to the overall value of the property. This ratio will determine how much of a guarantee you will need to support the home loan.
Most lenders will also insist you seek independent financial and legal advice before accepting the role of guarantor. An experienced mortgage adviser will talk through all your options in detail.
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