Take that first step onto the property ladder
Think it’s time for the kids to leave the nest? Find out what you can do to make the Great Australian Dream of home ownership a possibility for them too.
The proportion of young adult Australians staying home with parents is on the rise. According to data recorded by the Australian Bureau of Statistics in 2012/13, 31% of 18-34 year olds had never left home, compared with 27% in 2006/7. If you’re one of many Australians who own a property and are equity rich, what can you do to help your kids move into a home of their own?
After 37 years in the home loan industry, Aussie Broker Shareek Mohammed has helped lots of families work together so the next generation can get a head start on the property ladder.
“Acting as a guarantor is one way for parents to use their own home as security when their children need a mortgage,” says Shareek. “And if kids don’t have much money of their own, it can be their only option for having a decent deposit so they avoid paying extra for Lender’s Mortgage Insurance.”
Know the risks
When a parent acts as a guarantor for their child, the lender arranges for a part of the mortgage to be secured on the parent’s property. And if the child doesn’t keep up with their payments, the lender has the option to recover the debt from both properties.
“This is the risk parents need to be very clear about,” says Shareek. “If the loan payments aren’t made and the lender can’t recover all their costs from selling your child’s property, you can be forced to sell your home, too.”
An ongoing commitment
Even if things go smoothly, parents should be aware they’re committed to holding on to their property until they’re released from the guarantor arrangement. And that means they can’t sell their home, even if circumstances change.
“When you’re the guarantor, there are three ways your property can be released,” says Shareek. “Either your child’s property goes up in value and they can refinance or they’ve paid off enough of the principal to reach that 20% equity target. Or it can be combination of both these things. It can take years and that doesn’t always work for parents who plan to sell their home when they retire, or for other reasons.”
A one-off gift
So if going guarantor isn’t for everyone, what’s the alternative? If parents have the funds to spare, either from refinancing their home, or another source, they can gift it to their children instead.
“This no-strings approach can be a better option for some families,” says Shareek. “If parents don’t want to tie up or risk their own property in a guarantor arrangement, they can just make a contribution to the deposit and be done with it. But they’ll need to sign a declaration confirming it’s a non-refundable gift. The lender will need to be sure that the person buying the property isn’t taking on extra debt from their family, as well as a mortgage.”
The right choice with the right lender
So how can you get the right advice for your family? By speaking to a broker who asks the important questions, you can consider your options and act based on what’s best for you and your kids.
“I’ll take into account finances and personal situations for each family and recommend a solution and lender that makes sense,” says Shareek. “At every stage I’ll make it very clear to everyone what they’re agreeing to. And I’ll usually recommend parents and kids get independent legal advice so they know exactly what the consequences are if the loan isn’t repaid.”
Planning to help your kids buy a home? Share your thoughts in the comments below.