I’m not going to bore you by explaining how difficult it is for young people to enter the property market, this has been hashed out time and time again. What I will do is give you practical ways to assist your adult kids to take the next step and enter the property market.
Limited Security Guarantee
If your kids have managed to save enough to even consider starting the look at property, but not quite the full 20% deposit to avoid paying Lenders Mortgage Insurance (LMI), there is a way to expedite the process. A Limited Security Guarantee (LSG) is a way to get pre-approval without the full 20% deposit and avoid LMI which can equate to thousands of dollars. LMI is a one off insurance premium paid to protect banks from potential defaulting borrowers. The way a LSG works is a parent or close relative uses equity in their home to ‘top up’ the deposit to reach 20%. Essentially, if your child has saved $50,000 of an $80,000 deposit required, the shortfall of $30,000 is secured by using equity in your home. This should be discussed with your financial advisor before committing as it is not without risks.
Gifting funds or an early inheritance
Gifting a deposit or part of a deposit sounds ideal but in all reality it is not possible for most parents. If you are in the fortunate position to be able to do this, there are a few things to consider. The child still needs a good, stable income to prove they can service the loan. It is always best to seek your own financial advice before gifting money to ensure there won’t be any repercussions when tax time rolls around. Another idea is to give your kids a portion of their inheritance early. This allows you to see the benefits of your hard earned funds go to good use. Ensure your will is amended to reflect this change to avoid family issues when the time comes.
Buying as Tenants in Common
Buying a property with your adult children is not something that should be entered into lightly, but if done properly it can be fruitful for all involved. Tenants in common allows for the parties involved to each own their individual shares in the property eg parents own 25% and adult children own 75%. As opposed to the traditional 50/50 split of joint tenancy. Before committing to any large financial decision, ensure you have had an open and honest conversation about the potential negatives that may arise eg job loss, relationship break up, responsibility of outgoings/maintenance etc and how this could effect involved parties. You would be well advised to seek legal advice and even have a contract drawn up to cover such events and firm up the outcome of worst case scenarios. If well executed and the property is selected with investment factors a priority, all parties can be successful.
Becoming guarantor for your kid’s loan means you agree to use the equity in your home to form part of the security the banks require for the loan. This sounds simple enough, but bear in mind a few things before committing. Is your child financially responsible enough to avoid mortgage defaults? If the loan defaults, the lender will often sell the child’s home to discharge the mortgage and if there is a shortfall, you are responsible for the balance. It is wise to discuss and agree on a date in which your financial involvement comes to an end. When they have built enough equity in their home, it is best for them to refinance and discharge the mortgage on your home to end your financial involvement.
Continue to live at home while saving
This is one of the most common and easy ways parents can help their kids enter the property market. It may be a case of your kids living at home rent free for a specified period and an agreed amount of income is saved by a set period. It may also take the form of your kids living at home indefinitely whilst buying a property purely for investment. Either of these ways sound easy but place extra financial pressure on you to cover their day to day living expenses such as utilities, food etc. There is also the potential stress of sharing the house with kids who may have previously moved out and returned home. Ensure a date is set for the living arrangements to either come to and end or be reviewed rather than an open ended arrangement.
Assist with professional help
This is the most simple and often overlooked way to help your kids buy property successfully. If they have saved a deposit, have their finance pre-approved but are struggling to find a suitable property, this is a great way to help the process. Financially assisting with engaging a qualified Property Advisor or Buyer’s Agent will expedite the process, help educate your kids as to what is a good property, gives peace of mind they are paying a fair price and selecting the best possible asset within their budget. If their first property is well selected, they are in an excellent position to build equity and gain opportunities that could lead towards financial success. Property Advisors fees vary, but expect in the range of 1-3% of the purchase price.
If you would like to speak to one of our Property Advisors about how you can help your kids enter the property market, please call our office on 03 9018 7870 to book a no cost or obligation meeting.