Two ways to help your children get a foothold in the property market
Like all parents, you want your children to have the best possible start in life by helping them grow their own financial nest egg. And owning property is a great way to do it. So how can you help your children get a foothold in the property market?
Ideally, you’d be able to give them enough money to cover the 5% cash deposit and associated stamp duty and legal costs. But what happens if you don’t have the money? Can you still help your children get a foothold?
Yes, by using the equity in your home as security for the deposit and purchase costs.
The bank will take a limited guarantee over your home, supported by a first or second mortgage. It will then establish two loans in your child’s name:
- one for 80% of the new property, supported by that property (the main loan)
- one to cover the 20% deposit, stamp duty and legal costs, supported by your home (the support loan).
Why two loans? Well, the support loan is set up as a ‘traditional’ loan with both principle and interest repayments. But the main loan is set up as an interest-only loan to free up cash flow so the support loan can be paid off first. And once the loan balance drops below 80% of their property’s value, the security of your property is released.
Putting up your home as security can be a great way to help your child get a loan and avoid paying the Loan Mortgage Insurance. And of course, once the support loan has been discharged the equity in your home is preserved.
Then there’s the more traditional option—giving them the money for the cash deposit, stamp duty and legals. They’ll need to pay Loan Mortgage Insurance, but it may be end up being better for them than staying on the rental merry-go-round and paying off someone else’s home loan.
(Loan Mortgage Insurance is a one-off fee that indemnifies the lender against any loss they may sustain if they need to foreclose on the loan. The fee is added to the loan amount, and is not refundable.)
As part of the loan application, the bank will check to see if they have what the banks call ‘genuine savings’. If they plan on being an owner-occupier, the money will need to have been sitting in their account for at least three months. But if they plan on buying an investment property, the money will need to have been there for at least six months.
Note: Some banks will also accept non-genuine saving.
Getting a foothold in the property is an important step. And with an equity loan, you can help your children make that step even if you can’t provide the money for a traditional loan.
And who knows? One day they may do the same for their children.