How Parents, Family & Friends
can provide support
The barriers to home ownership might seem insurmountable but there are many ways to overcome the challenges.
First home buyers who want to liberate from the rental churn or finally leave the family home, have it tougher than their parents, one of the reasons why mums and dads are increasingly willing to assist.
While you might prefer to stand on your own two feet to get into the market it doesn’t hurt to know there are alternate pathways to achieving your dream.
Parents who haven’t the means or desire to co-fund their children’s property purchase will often permit their adult children to live with them rent-free, provided they are diligently putting aside savings to accumulate a deposit. Some choose to make saving a non-negotiable condition by charging rent which is deposited into the child’s savings account.
This type of loan is also known as a limited guarantor loan whereby parents use the equity in their home to cover part of the loan, usually to supplement a 20 per cent deposit. There are risks however and if the child can’t repay the mortgage the parents will have to pay the unpaid part of the loan which could mean they lose their own home to pay the debt. All parties need to make sure of the child’s capacity to repay the loan and of course factor in increases in interest rates. Independent legal and financial advice are a must.
Parents can buy a property jointly with their child however like all business partnerships there is potential for disagreement when priorities change. If you do opt for this type of financial arrangement make sure all scenarios are canvassed and written and binding agreement reached on the strategy to deal with it. Be aware that co-purchasing may affect access to first home buyer assistance. Independent legal and financial advice are a must.
If parents are in a financial position to lend money to the child it may be the simplest arrangement but make sure it is set out in a legal contract with a written and binding agreement about how the loan is to be repaid and when. A solicitor’s advice is important to protect the interests of both parent and child. Be mindful that parents’ circumstances and priorities can change and neither party wants a family falling out if the loan is suddenly called in.
If owning your own home is the impossible dream you might consider owning half the home, co-buying with friends or family. It’s not an arrangement that suits everybody but if you make sure all the necessary legal protections are in place it could be the difference between cracking the market or renting forever. For singles, especially, you get the buying power that couples with two incomes enjoy and you don’t have to co-habit if you don’t want to. Your solicitor and financial/tax advisor are the most important members of your advice team when you’re considering a co-ownership or Landholding Agreement. Most of the things that could go wrong are predictable but if you reach agreement beforehand on an exit strategy you don’t have to put the relationship at risk. You don’t have to be bound to a 50-50 split and if one party can put in a bigger deposit or make larger mortgage repayments you can vary the percentage of ownership. As tenants in common you will need to work out what happens if one of the co-owners dies and the beneficiaries want to sell up. Owning a home comes with costs attached and it’s best to have a formula in place for compensating a co-owner if they’re picking up a larger share of the costs. Life can be full of surprises and if one owner gets into financial difficulty or wants out for other reasons, you’ll be glad to have negotiated an exit plan before not after the event.
Please note: Matters such as stamp duty, income tax and capital gains tax should be considered if choosing to buy property, as well as the various First Home Buyer concessions that are offered by government entities. Please speak to your Financial/Tax Advisor to better understand your situation.