If you thought that your pre-retirement years were going to be filled with more golf and long lunches then think again!
Current property prices in Melbourne are out of the financial reach of many young homebuyers. Parents are increasingly having to step in to help their children afford their first home.
We take a look at three ways to help your children into their first home, whilst also protecting your own financial security.
PROVIDE A LOAN
Whilst not every family is in the position to offer straight cash towards a first home purchase, it is crucial to ensure that the parties understand the terms upon which the money is being given.
- Is it a gift or is the purchaser expected to repay the money in the future?
- Will interest be charged on the money borrowed?
- What happens if the property is sold in the future?
A carefully drafted loan agreement between parents and the borrower(s) will ensure that at the outset both parties know what they are getting into and help to guide them if there are disputes in the future.
ACT AS A GUARANTOR
A parent may be in a position to act as a guarantor; agreeing to fulfill the obligations of the borrower if they are unable to make their repayments.
This ‘ties’ the parent to the transaction. It is an area that requires good communication between the borrower and guarantor because there is a huge burden on the parent if the borrower defaults.
Some of the common causes of tension that we see are guarantors objecting to the way borrowers are handling their day-to-day finances. When parents have ‘skin in the game’ all of a sudden they have a very real interest in making sure that there is money to pay the mortgage.
If you are going to have a parent guarantor then the parties need to be clear how they are going to make their repayments.
In this situation spending habits become more scrutinised with things like overseas holidays, frivolous spending or even changes of career causing fights between the parties. The guarantor can be left feeling like the potential financial failure of the borrower leaves them in the firing line.
USE THEIR ASSETS AS SECURITY
Many parents have been able to pay off the family home before their child enters the property market. Particularly as first home buyers are now older because they need to save more for a home deposit.
An unencumbered title (usually a certificate of title that does not have a mortgage on it) can be used as a security for the mortgage taken out by their child.
Some parents are reluctant to put their family home on the line as a default by the borrower may result in the mortgagee ‘calling’ the security and selling it to recoup their money.
Whilst your here take a look at “Common mistakes when borrowing from your parents”. Click here to read more.
Contact the experienced lawyers at Your Property Australia to discuss how we can protect your security in retirement whilst getting your children into their first home.
