Family help to buy a home
There are a number of ways a family can help with the purchase of a home;
1 Banks have in place family guarantees for a larger level of borrowing to buy a home BUT…. check the fine print. The interest rate in the case of say a 90% borrowing of the purchase price may cost an extra 1% per year! It will then take a few years to build equity in the home before the family member can be released from the guarantee.
2 A contribution for a property deposit suddenly appearing in an ‘adult child’s’ bank account is viewed by the Banks as a ‘Caution’ before approving a loan. There is likely to be requirement for 1 – 2 years of statements showing a savings history like that of a property mortgage payment. This is ‘proof’ to the Bank that the new borrower can make the payments and not pose a risk to the bank. Loan defaults are three times more likely when parents have helped with a deposit or kick start.
3 A family gift or interest free loan (or low interest loan) should be legally documented for protection of the giver/ lender. Whether the home buyer is a single son or daughter or in a partnership this should be the case. This legal ‘protection’ is for the benefit of the parents and the son or daughter in the event of future legal problems (e.g. a car accident with forgotten car registration!) or a relationship breakdown. The legal documentation is also a lesson in the world of money and legalities.
4 Purchase of a property in part ownership with a family member such as a parent or sibling is an option. Should one partner wish to sell later, it could activate a capital gains tax situation or the need for a review of the finance. This may be a disadvantage or advantage to the remaining owner depending on their financial circumstances at the time. Alternatively, the property could be retained for the long term and used as a steppingstone to buy another two properties later in the name of EACH of the original owners.