Guaranteeing your children a new home

Personal-Financial-Planning-blogMany parents I speak to would love to help their kids buy their own home. (Usually, so they can have more privacy without a home filled with Gen Ys & Zs!) With housing costs normally out of reach for most young adults, staying home until they might be able to afford a deposit places added financial pressure on Mum & Dad.

We usually discuss different options available, including allocating the board the parents receive straight into an account so it builds up enough to gift back to their child helping them raise enough for the deposit. That’s okay if Mum & Dad don’t need that money to pay for the extra mouth/s to feed.

When we know that Mum & Dad have paid off their home and are just as excited about their children’s first home purchase as the “kids” themselves, we alert them to an alternative way to help them.

Many lenders offer a facility which enables parents to contribute to the purchase at no direct cost. Known under various names, a “family guarantee loan” enables parents, or another family member, to use their own home as security for up to 30% of the purchase price.

It not only ticks the boxes for Mum & Dad, but also for the young borrower, in particular:

  • – Your kids may be able to afford a more appropriate property that will grow in value over time.
  • – The loan can increase a current deposit or act as the full deposit.
  • – Your kids won’t have to pay costly mortgage insurance (usually required when borrowing greater than 80% of the purchase price).
  • – Your liability as the guarantor is limited to 30% of the purchase price and this is reduced as the mortgage is repaid.
  • – When sufficient equity has built up in the property, you can be removed from the loan.

But we always point out that there are certain risks involved in this. Such as:

  • – The lender will take out a mortgage over your home for the amount you are putting towards the loan.
  • – If the borrower (your child) defaults on their home loan repayments, the lender will sell the property to recoup the loan. If the sale price doesn’t cover the outstanding loan, you must make up the shortfall to the amount guaranteed. If you can’t meet that payment, the lender could take possession of your home to clear the debt.

Like all things you have to look at this type of loan with as little emotion as possible – sometimes very hard when all you want to do is help out your kids – and have some peace and quiet at home.

Everyone has a different outlook but I suppose this is better than your kids paying high rent to pay off someone else’s property when they could be paying off their own.