With interests rates at an all-time low, the cost of servicing a mortgage has never been lower. However, rising house prices mean deposit requirements have never been higher, and therein lies the big problem for many first home buyers. For those with parents or family members who may be able to help with a deposit for a first home, here are some of the options and the key things to look out for.
Gifting a deposit
A cash gift from a parent is the most common way for parents to help their children with a deposit. For parents who are in a secure financial position, gifting cash is also the most hassle-free option.
The biggest advantage for parents is that they’re not liable for their child’s mortgage, by having to use their own home as collateral. And by gifting the cash, they’re helping their child get into the property market sooner, instead of waiting until they’ve managed to save the same amount.
Most lenders prefer cash gifts over a loan, so the borrower isn’t liable for paying back their mortgage as well as the part of the deposit that the parents contributed. In addition, lenders will want to see that borrowers have managed to accumulate their own savings.
Another option similar to a cash gift is an interest-free loan from parents, with no scheduled repayments or timeline to pay back the deposit. Just like with a cash gift, the child isn’t required to make repayments and the debt is usually only repaid when the property is sold.
Again, with this option, parents are not liable for any part of their child’s mortgage, and provided the property’s value continues to improve, their part of the deposit can be repaid on the sale of the property.
Act as a guarantor
Homeowners with equity in their property may be able to guarantee all or some of their child’s first home deposit. However, banks will not lend above 80 per cent of a parents’ property, so parents with an existing mortgage will need to crunch these numbers carefully before going down this route.
On top of this, banks will require parents to meet servicing standards on their additional debt, as well as the debt their child will be taking on. For parents who may be close to retirement age, this could be a major hurdle. In this case, it’s worthwhile discussing the options with a mortgage adviser who understands the rules around being a guarantor.
For some parents, buying a property with their child and becoming a joint borrower in the mortgage contract is the ideal solution. Co-owning is an attractive option if parents are still working and can service the mortgage. As a joint borrower, any capital gains would be shared on the sale of the property.
Avoid the pitfalls
However you choose to help your child buy a first home, it’s vital you seek legal and financial advice before committing.
Consider your current financial situation and how any additional debt could impact your future retirement. Think about your child’s partner and how the property will be divided should the relationship deteriorate. Lastly, consider potential changes to the property market that could impact property values and your investment.
To find out more about helping your child buy a first home, contact a Mortgage Express branded mortgage adviser today.