More ways to help your children buy a home of their own
There are many ways that parents can help their children get a home of their own. Here are a few that you may not have thought of:
Selling your home at a reduced price
As a parent, and in the future a potential downsizer, you may consider selling the family home to your child. There are lots of things to be aware of, particularly if you have more than one child. However, it is a strategy to consider and it may be beneficial in some situations.
Firstly consider how much your home is worth, and what you would be prepared to sell it for. Generally, the first step is to approach a real estate agent or a property valuer. They will advise you of the current market value if you sold it on the open market. You then need to decide if you would sell it to your child at this value, or at a reduced price. If you sell at a reduced rate, you still receive some funds for the sale. The reduction is effectively a ‘gift’ to the child.
Some lenders look quite favourably on this transaction, in that they will end against the valuation price. If the purchase price is less than the valuation, the child may be able to borrow more against the property. This may reduce their need for a large deposit or for paying Lenders Mortgage Insurance.
How does it work?
For example, say your property is valued at $750,000, but you sell it to your child for $650,000. The Lender may provide a loan (subject to servicing criteria) for say 80% of the property value which is $600,000 without the need for Lenders Mortgage Insurance. This means the child requires a deposit of only $50,000 (plus stamp duty and costs). This is significantly less than the 20% deposit usually required. The parent has ‘gifted’ the balance of the deposit to them in the form of the reduced purchase price.
Property share is a great way to get into the property market. Some lenders are offering property share products that allow you to buy a property with someone else, but keep your finances separate. First home buyers can use it to purchase a property with siblings, friends or family members. Parents can use it to help their children – potentially using the equity in their own homes for the deposit. Read our Property Share article here.
Going Guarantor on a loan
Sometimes, children are not able to secure a loan on their own. This may be because they don’t have a large enough deposit, their credit history is not sufficient, or their income doesn’t meet servicing criteria. As a parent, you may be asked to go guarantor on the loan. This is a legal obligation which means you are legally responsible for paying back the entire loan if the other person cannot or will not make the repayments. You will also have to pay any fees, charges and interest. However, as a guarantor, you don’t have the right to own the property. So it’s not something that you want to take out without considerable thought. ASIC’s MoneySmart website has lots of good information about whether or not you should consider being a guarantor and what other options are available to you.
If you want to help your children get a home of their own, please contact Milestone Lending for information about the options available to you on (02) 6176 3110.
Milestone Lending trading as Milestone Financial Services ABN 68 100 591 508 is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee.
This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. The examples used are illustrative only and are not an estimate of the investment returns you will receive or fees and costs you will incur. If you decide to purchase or vary a financial product, your financial adviser, Milestone Financial Services Pty Ltd and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/ or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information on (02) 6102 4333.