Help Your Child to buy a home – With ever-increasing property prices, many first-time buyers will face many hurdles while trying to buy a home. Many can’t afford it because they have to pay back student loans and they can’t meet the strict home loan requirements.
That’s why more parents are now helping their children to buy their first home. In this quick guide to home financing for adult children, we will look at some of the ways to help your progeny become homeowners.
1. Give Your Child a Cash Gift
You can help your child to make up for the shortfall in the deposit for their mortgage. This will enable them to get their home loan at a lower interest rate. Many banks will take a gifted deposit, although they may request for a confirmation that you gifted the money to your child. Banks will request for confirmation because of:
* Affordability: If the money is not a true gift but a loan that requires repayment, the home may not be affordable because your child will need to pay back two loans a month!
* Possible loan default: If your child is not able to pay back the mortgage and the bank needs to repossess the home, the bank will need to be sure that you will not be a part-owner of the property.
2. Help Your Child to Research Home Loans
As a homeowner, you are in a better position to help your child to research home loan options and get a good deal. The interest rate is one of the most important factors to consider. Since a mortgage loan is paid back over the long-term, a relatively small increase in interest rate can add up.
You also need to consider your child’s income level and amount of disposable income to know the maximum amount they can borrow. Then you need to compare different lenders and brokers and gain insight into current interest rates, loan fees, monthly repayments, loan terms, and other particulars related to the purchase.
3. Use Your Home Equity
You can make use of part of the equity you have built up in your home to secure a home loan for your child. If your child has to take a mortgage for the entire value of the property, you can use your home as equity to secure about 25% of the mortgage.
If all goes well and your child makes the monthly payments without default, you will lose nothing. But if they can’t afford to pay regularly, you will be liable for a part of the loan and this can put you in a potentially dangerous financial situation.
4. Offer Your Child a Family Offset Mortgage
To help your child get a mortgage at a lower interest rate, you can use your savings as security for the loan. This money will allow the lender to recover part of the loan if your child can’t pay back the loan. Lenders can offer customers special lending conditions, something that is commonly referred to as a family or parent offset mortgage. This allows parents to use their savings as an offset for a child or another family member’s loan.
The major disadvantage of this is that you will not be able to withdraw and use your savings until the term is completed. That’s why we recommend that you avoid using your retirement savings as security for your child’s home loan.
5. Act as a Guarantor for the Mortgage
When you act as a guarantor for a mortgage loan, you are automatically agreeing to take over the monthly payments if your child cannot do so. You may not be required to be a guarantor for the entire term of the loan as long as your child makes payments promptly for a specific period. However, few lenders offer this option.
6. Take a Joint Mortgage
It is possible to buy the home together with your child through a joint mortgage. You can also visit for best mortgage brokers. You will both be liable for paying back the loan every month. The major benefit of a joint mortgage is that you can qualify for a much bigger loan.
On the other hand, you must be aware that your child’s home will become your second home. So you may be required to pay additional stamp duty. Some lenders will, however, permit you to take a joint mortgage without you adding your name to the home’s title deed. This type of arrangement is preferred and can help you to avoid paying additional taxes.
As you consider your options for helping your adult children own their first home, you need to carefully evaluate the pros and cons that come with the home-buying process. Whilst the ultimate goal is that your children get onto the property ladder, you need to also ensure that your preferred option will not put you in a risky financial situation, particularly if you are getting close to retirement age.
