Giving Your Children a Hand in the Property Market
Entering the property market is an important life event that requires careful thought and preparation. This significant financial commitment often sees parents helping their children to secure property in one way or another.
Parents often help their children enter the property market by acting as a guarantor. The implications of this choice mean it’s essential to carefully evaluate the responsibilities that come along with it. Acting as guarantor means you are responsible for repayments if the loanee becomes unable to do so. As a guarantor, you are agreeing to use the equity of your property as collateral for the loan. Here are some important matters for parents and guarantors to think about before making this decision:
Eligibility
Guarantors are usually closely related to the loanee – typically an immediate family member, a relative or partner. Besides relationship between guarantor and loanee, eligibility requirements take into account age, property location and the guarantor’s financial situation and employment status.
Credit scores
Credit scores are figures based on a financial history analysis that help lenders determine an individual’s borrowing reliability. The first step is to ensure your child is establishing a good banking history, by gaining work to earn a steady income. Once your child has a job and is 18, they become eligible to apply for a credit card or loan. Consistent income, evidence of savings and defensible spending will act as strong proof when applying for loans or credit cards.
Gifting Funds
Sometimes parents may help their children by gifting funds to help with a deposit. With regard to buying property, a gift fund is to help with the deposit and avoid paying Lenders Mortgage Insurance. To avoid this, you require a 20% deposit of the purchase price. Gifting funds does not help with servicing, it’s just the shortfall of deposit required to get into the market.
Preparing your kids for financial responsibility
To put your children in the best position to have a secure financial future, it’s essential to teach good saving habits and the value of money early. Some effective ways to help your kids learn about money and saving:
- Answer questions about money (more information as age appropriate)
- Open them a high-interest savings account
- Set savings goals (might consider incentivising)
- Teach the importance of delaying gratifying purchases
Some parents might want to develop their child’s saving habit, by matching their efforts. Like an employer making a super contribution, a similar system can be implemented to incentivise your child’s saving achievements. Rewarding them with a bonus when they reach their savings goal, or even offering to match with a percentage of their current savings will encourage them to save rather than spend. For more information on preparing your children for financial responsibilities, see Provide Wealth’s blog on ’Teaching Your Family About Wealth Management’. *link once uploaded*
Becoming a guarantor is a substantial commitment, but one that is certain to help your child to move along in life. Consider all responsibilities that go along with it before making the decision. Remember that a child’s ability to be money wise is dependent on being exposed early to financial concepts by having ongoing discussions with their parents as they grow.
For any questions about being a guarantor or helping your children get their start in the property market, reach out to a member of the Provide Finance team.