Being in the position to help a child with the deposit for their first home is nice. But it can carry certain risks mitigated by getting the right legal advice. Especially when there is a spouse involved.
From my experience there seems to be three main ways to do this.
- A guarantee limited to the amount of shortfall of the required deposit
- Parents borrow the shortfall under their own names and give it to the child
- Parents and the child borrow jointly for the deposit amount and the child borrows the rest
With all options there is usually a servicing test to ensure the parents can afford the lending from a cashflow basis. With a guarantee the parents can be called upon to pay a lump sum in the event of a loss through a mortgagee sale of the child’s property. Even without this loss there can be pressure on the parents to avoid a mortgagee sale. This can at times put the parents home in jeopardy, especially if at the time the parents are unable to raise funds.
Also the ability to remove the guarantee at a later stage depends on the lender rules and the child’s financial strength.
Parents borrow individually or jointly for the deposit
This has an advantage in that as long as payments are made on the deposit loan, the parents home could be safe. Also as the loan gets paid down the reliance on the parents home shifts towards a safer zone.
Either way to is prudent to seek legal advice before committing to a property and loan, as it is to check your options with a financial adviser like us.