The Bank of Mum and Dad: How to Help Your Child Buy a House
As a parent, you’re always wanting the best for your children.
In a world of rising interest rates and a skyrocketing cost of living, it’s hard watching them struggle to pull together money for a deposit.
If you’re wondering how to help your child buy a house, you’re not alone.
However, it’s essential to consider how helping your kids buy a house can impact you.
Here are some things to think about if you’re a parent looking to support their kids on their homebuying journey.
Preparing them for the purchase
Buying a house is a significant milestone in anyone’s life.
Whether they’re a first home buyer or purchasing their next home, it’s always just as exciting.
Seeing your children grow up and purchase their first home is another milestone in which most parents take great pride.
Before they buy a house, here are some things you can do to assist them with the process.
Make sure they seek pre-approval
Pre-approval is where a lender agrees – in principle – to lend you money towards the purchase of a house, but hasn’t proceeded to full, unconditional approval.
This is an important step for your child, as a lender will assess their finances and ensure that they are fit to service a loan.
Assist them with organising their legal documents
The pre-approval and loan application process (which you might know from your own experiences) requires gathering your legal and financial documents for the mortgage broker to assess.
This includes bank statements, proof of identity and most recent payslips.
Helping them round up and locate all these documents, so they’re ready to present to the broker is a great way to keep them organised.
Keep extra costs in mind
When buying a house, a considerable emphasis is put on the deposit.
However, this often means that the additional costs – such as lender’s mortgage insurance (LMI), stamp duty, conveyancer fees, etc. – are forgotten.
Keeping these payments in mind means you can help your child budget for more than their home loan.
Take them to a trusted mortgage broker
Last but most importantly, take them to see an expert.
Putting your child in touch with an experienced mortgage broker means that they will be guided through the process every step of the way.
Inovayt mortgage brokers know how hard it is to purchase property, so they work to make the process as smooth as possible.
One of the most common ways you (the bank of mum and dad) can help your child to buy a house is through a guarantor loan.
This is a great way for parents whose children are struggling to pull together a 20 per cent deposit and who have equity in their home to help out.
A guarantor loan allows the borrower to borrow up to 105 per cent of the purchase price, including purchasing costs such as stamp duty, legal fees and bank fees.
Guarantor loans differ from gifts or loans of money as the guarantor does not hand over the deposit to the borrower.
Instead, the lender will register a mortgage against the guarantor’s property or asset for deposit. This can be up to 25 per cent of the purchase price of your property.
If your guarantor does not have an existing property or sufficient equity but they have some savings, they can provide you with a non-refundable gift that can go towards your deposit.
A non-refundable gift is a way parents can help their children out with a house deposit.
Although lenders want to see that your child can support themselves (a minimum of 5 per cent genuine savings), a cash gift can help set them up.
However, it’s important to note that a cash gift is non-refundable.
Lenders might ask you to sign a gift letter or statutory declaration stating that you’ve given the money unconditionally without the expectation that it’ll be repaid.
If you’re contributing a significant amount, be mindful of potential future scenarios.
For example, if your child is buying with their partner and they separate down the track, their partner might end up with half of the property that you’ve helped fund.
Loaning the money
If you don’t want to gift the money outright, a formal loan agreement offers greater protection to you.
Even if you don’t intend on being repaid, structuring financial assistance as a loan gives parents the option to recall the money later on.
These loans can get quite tricky, which is why a lawyer needs to be involved, and careful documentation needs to be drawn up.
This documentation must include specific repayment milestones and detail about whether the loan will accrue interest.
What to consider before you help your child buy a house
Before deciding how to help your child buy a house, take a moment to evaluate your financial circumstances and whether you’re able to help.
Here are some things to think about:
- Which support option works best when it comes to your financial situation?
- If you have multiple children, will you be helping them all equally?
- What will you do if you’re a guarantor to your child’s property, and they can’t pay their loan?
- Do you know exactly what’s involved in this process?
As a parent, you always want the best for your kids.
Many parents want to know how to help their child buy a house but aren’t sure what their options are.
At Inovayt, our team of expert mortgage brokers are qualified to work with parents and their children alike to set them up for a stable financial future.
Parents often wonder how they can assist their children and get them into the property market sooner – especially with the rising cost of living and high-interest rates.
If you’re wanting to figure out the best way you can help your children get into the property market, get in touch with one of our expert Inovayt mortgage brokers today.