If you’re thinking about helping your kids get on the property ladder, here’s everything you need to know.
05 July 2016
As house prices across the country continue to head skywards, many parents are giving their children a hand to help them get on the property ladder. In some parts of the country, deposit sizes can be around the $100,000 mark – so it’s no wonder parents want to help. If you’re thinking about helping your kids buy property, here are a few options to consider:
Gifting them a deposit
Gifting your children enough money for a deposit is the obvious option for many parents. However, unless you have tens of thousands of dollars lying around – finding the money can be tricky. For many parents, this means either selling existing investments likes shares, or redrawing on the mortgage.
Most banks will accept gifted deposits, however, they require a portion of the deposit to be ‘genuine savings’. This means at least five per cent of the deposit needs to have been in your child’s bank account for a minimum of three months before the purchase. So you can’t gift your children the entire deposit – they’ll have to provide some of it themselves.
Lending them a deposit
Not all deposits have to be gifts – some parents want to loan the deposit to their kids and then have it paid back over time. This is also a popular option for parents who want to protect the deposit because the child is in a relationship with another person who also intends to live in the property after settlement.
For loaned deposits, the lender will require a written letter from a lawyer outlining the deposit is loaned - and the amount of any repayments that need to be made. The lender will then factor in these repayments when calculating whether your child can service the loan.
How big does the deposit have to be?
If you are thinking about gifting or lending your kids a deposit, you’ll probably want to know how much it needs to be. Most lenders will require a deposit that is no less than 20 per cent of the price paid for the property. Some banks will lend when the deposit is less than 20 per cent, but they can only do this for 10 per cent of their total portfolio. Some non-bank lenders offer low deposit loans and this can relieve the pressure of pulling together larger deposits.
However, loans that are more than 80 per cent of the property value may incur additional fees and/or a higher rate. So if you can afford to lend your children a bigger deposit – it might save them money.
Acting as guarantor
Signing as a guarantor means putting up equity in your own property as a security for your child’s loan. In the event where the child can no longer meet the repayment requirements, a guarantor is also legally responsible for paying back the entire loan in full. The issue many parents come up against in the role of guarantor is they struggle to pass the stringent stress testing of the banks. When a loan backed by a guarantor is processed, the lender must not only test that the owners of the home can meet the repayment requirements in a number of different situations, but also that the guarantor can as well. For this reason, guarantor loans are less popular.
Buying the house together
Instead of being a guarantor, some parents choose to buy the house in joint names with their children. This allows you to combine equity in your current home with any savings your kids have to make up the deposit, and, because you’re joint owners, the serviceability testing is done on all the owners collectively. However, because this option means that parents remain jointly and severally liable for the full debt, this option isn’t always popular for those parents keen to see their kids stand on their own two feet sooner than later.