As the cost of housing has gone up, a growing number of parents are offering to help their children buy their first property. So, if you’re a parent looking to provide financial support to your child, here are some of the different options you might wish to consider.
Gift them a deposit
One way many parents choose to support their children to get on the property ladder is by gifting them the money for a deposit. However some traditional lenders look unfavourably at gifted deposits, so it’s important to understand what the options are.
Any time a traditional lender looks at an application for finance they want to see that the borrower has a good savings history. To do this they require a certain amount of the deposit be held as ‘genuine savings’.
This amount can vary bank to bank and to be classed as ‘genuine savings’ the money has to have been in the borrowers account for more than three consecutive months.
Some home buyers can find themselves stuck when they receive a gifted deposit as they find out it won’t be recognised by the bank as genuine savings.
Loan them a deposit
Not all deposits have to be gifts. Some parents choose to loan their child money for a deposit on the condition that it is paid back. Again, these types of deposits are looked at differently by traditional lenders, so it pays to understand the implications if you intend to take this route.
The good news for first home buyers with either gifted or borrowed deposits is there are flexible lenders in the market like Liberty that will accept both. To learn more about our home loan products click here.
Provide a family guarantee
A family guarantee allows you to effectively use the equity in your existing home as the deposit for your child’s new property purchase. The benefit of this arrangement is that it can often eliminate the cost of expensive Lenders Mortgage Insurance (LMI).
LMI is a one-off cost that is typically payable when the new loan amount exceeds 80% of the value of the property. In the case of a family guarantee, because the lender has two properties as security for the loan, expensive LMI can be avoided. To learn more about LMI, read our blog here.
If providing a family guarantee is something you are considering, it is important to get good advice. While your child is to be responsible for repaying the full amount of the mortgage and your guarantee is limited, you ultimately will need to be comfortable with the additional costs and commitment should the guarantee ever be called on by the lender.
For many families this solution provides a great way to help their children get onto the property ladder for the very first time. Assuming the new property appreciates in value, the loan can then be refinanced and parents released from the guarantee.
Buy a house together
For some parents, buying a house together with their child is the preferred option. Potentially this can strengthen the application for finance, and also mean the deposit and stamp duty commitments can be shared. Plus all parties get to share in any capital gains should the property increase in value.
While this may seem like a straightforward option, some lenders may look at parental borrowers less favourably, especially if any parties to the loan are nearing retirement and no longer expected to earn wages.
Because these types of loans are considered by lenders on a case by case basis it pays to get good advice.
No matter how you choose to help your children get a foot on the property ladder, the first step is to talk to an LNS adviser about the different options and which one might work for you. You can find your nearest LNS adviser here.