Helping your child buy a house

But, can you afford to help, what kind of help could you provide, and how should you protect yourself?

Parents like to help their children to buy a house because it gives them stability and it can set them up for a brighter financial future. BUT, it’s important that you don’t overstretch your own finances and put yourself into a risky position. You still need enough money to support yourself in a comfortable retirement.

It becomes increasingly complicated if your children fail to make their repayments or split from their partners – and if you have more than one child, how will you balance out the needs of each one?

You’ll need to consider all those factors before you make a decision in terms of helping your child buy a house.

If you do decide to support your children in their efforts to buy their first home, start by considering the topics we discuss below:

A cash gift

A cash gift is the simplest and cleanest – your money might be gone but so are your obligations.

The risk here is if your child splits up with their partner, they could be entitled to take 50% of your gift.

Being a guarantor

Being a guarantor does not involve any cash up front, however if you child defaults on the loan payments you will be responsible for them moving forward and potentially any shortfall in the loan upon the sale of the property.

This is much more of a risk in a falling property market than it was in a rising one over the last couple of years.

A secured loan

A secured loan will ensure that the money provided will stay within your family, but we have heard plenty of stories about banks not accepting this arrangement and requiring the funds to be gifted to ensure that the property is not over leveraged, even though the parents’ security would rank behind the bank.

Co-owning – Beware of the brightline test

Co-owning the house with your children will mitigate the risk for both parties and you will also be able to enjoy the capital gains of ownership (but of course your child will expect you to pass those gains onto them at some stage).

The negative here is tax related. The Brightline rule does apply to the parents share of the property as it would not be your main home, so any gain on the sale of your share within 10 years (proposed to be 5 years for a new build) would be taxable.

Letting them live with you rent-free

Letting them live with you rent-free will help your child save faster, but let us be honest how long do you want your children living with you?

Protect yourself and your kids

The most important factor for the Bank of Mum and Dad is protection. It’s not only for you, but also for your children.

Both parties should get independent advice and ensure everything is set out clearly on paper by your lawyers.

We can recommend a lawyer if you need one, or can talk to you about the pros and cons of the various options and which one could be best for you.

Contact the team at DNACA if you’d like further advice and assistance.