Think twice before loaning for love
02 September 2014
With today’s cost of living, there is a huge amount of pressure on parents to help their kids get a financial leg up in life – particularly when it comes to entering the housing market.
When you consider the large amount of money needed for a deposit and stamp duty, it’s no wonder parents feel obliged to offer a helping hand.
Some parents choose to become a guarantor for their children when an adequate deposit has not been saved. This involves putting the family home up as security and signing a guarantee for your family member, which means you are legally responsible for paying back the entire loan if the person cannot make the repayments along with any fees, charges and interest.
If you are thinking of going down this path, there are many risks to consider before making your decision.
Can you offer the same level of support to all your children? How will your personal security, credit rating and financial situation be affected if something goes wrong? If your kids can’t save for a deposit, how do you know they can service a loan? What happens if your child separates from a partner and can’t afford the full repayments on one wage? What if your child loses their job and can’t make the repayments? Can you afford the repayments?
So if things do go wrong in the worst-case scenario, you could lose your home. In other instances your future retirement and the lifestyle you thought you were going to lead could well be compromised.
While the temptation to guarantee a child’s home loan is understandable, well intentioned parents should know there are alternatives that will help your children stand on their own two feet.
Research the home loan market yourself, use your experience and knowledge to seek out alternatives – they do exist. Consider alternatives that might enable your child to be eligible for any first home buyer grants or other financial assistance.. In South Australia there are still grants available for off-the-plan apartments and housing construction.
There are lenders that will accept lower deposits, accept any grants as part of that deposit, and not charge Lenders Mortgage Insurance (LMI) where the loan to valuation ratio is greater than 80%.
In some cases, HomeStart accepts as little as three per cent of the purchase price as the deposit and can have lower upfront costs by not charging LMI
We all love our children, but when there are alternatives available, there is no need for parents to put their own future financial security at risk.