How to help your kids buy a home

You remember the feeling. Back in the day, when you trimmed back and saved hard towards the deposit for your first home. Today, deposit goalposts can change quickly, which can be really frustrating for those trying to get a foot on the property ladder.

Financial input from family might nip this demoralising cycle in the bud. Let’s take a closer look at the common options of gifting or acting as a guarantor.

There are two main types of gifting. A family member can give money towards the deposit:

• With no intention of it needing to be repaid
• With a formal agreement confirming that the money only needs to be repaid if the property is sold.

For both types, it is important that everyone involved gets independent legal and tax advice, before any money changes hands. Independent advice means the lawyer or advisor helping you isn’t also giving advice to anyone else involved in the transaction – so that lawyer or advisor can take you through all of the risks and issues to consider. 

Sometimes, banks may be able to take a mortgage over a home owned by family members as extra security for another family member’s home loan. 

Doing this helps reduce the Loan to Value Ratio, or LVR, which is the amount of the loan as a percentage of the security available to a bank. A lower LVR means the deposit to buy a property may not need to be quite as big.

Where this happens, banks will generally need a guarantee from the family members giving the mortgage, which means they agree to be responsible for repaying some or all of the home loan if needed. A person giving a guarantee is called a guarantor. 

The guarantor’s security doesn’t need to cover the entire loan either, just a portion of it. Generally, it’s the amount needed to reduce the LVR to 80%, which helps the family member hit their deposit goal sooner. The guarantee can often be limited to the extra security needed to get to 80% LVR. 

Added bonus – it also means a low equity premium or margin won’t apply, because they won’t be borrowing more than 80% of the value of the property.

• Your child wants to buy a property worth $500,000.
  
• Subject to their bank’s lending criteria, they can afford to repay a $500,000 loan.
• They’ve saved $25,000, so that’s 5% of the purchase price. 

• They need a deposit of 20% (excluding transaction costs) to avoid paying a low equity premium or margin. 
  
• 20% would be $100,000, so they’re currently $75,000 short. 

• You own a home valued at $800,000 and already have a mortgage with your child’s bank.
• Subject to your bank’s lending and security criteria, you have sufficient equity as you only owe $200,000 on your own home loan. 
• You seek independent financial advice and agree to be guarantors, using $75,000 of the equity in your home (as approved by the bank) as extra security for your child’s home loan. 
• You sign a guarantee which provides that you guarantee your child’s home loan, up to $75,000 plus interest and costs. 
• Your child can borrow the $500,000 to buy the property without having to save more for a deposit – their bank’s responsible lending checks and lending criteria apply. 
• Your child won’t have to pay a low equity premium or margin. 

Once the equity in the home they’ve bought reaches 20%, you or your child can apply to your child’s bank, asking them to release you from your obligations as guarantor. Happy families!

A guarantee is a serious commitment. The lender is taking the guarantee to help make sure that the repayments on the loan will be met. 

Under a guarantee, a guarantor will generally be liable as well as, or instead of the borrower. So, if the loan isn’t repaid, the lender can ask the borrower or guarantor to do so, and if they need to, the lender has the right to sell the borrower’s property or the guarantor’s property to recover the loan. 

If a guarantee is not limited to a particular amount, then the guarantor could also be responsible for all debts that borrower has with the lender, not just the home loan.

It’s important to consider all of the risks and the legal and tax implications of giving a guarantee, so we require all guarantors to seek independent advice before entering into one. 

We recommend this advice is independent, which means it is provided by a solicitor, accountant, or tax advisor who is independent from the borrower and the bank.

The same applies to any gifting of money towards a deposit. It could be the difference between good or awkward family gatherings later on.

Guaranteeing or gifting? When it comes to the deposit race, both could get a loved one into a home sooner.