Tips on helping kids buy homes
Our recent feature on the options facing the "bank of mum and dad" when it comes to helping kids in the property market garnered hundreds of comments and suggestions.
It's clear the subject deserves a follow up in order to capture the extra suggestions readers put forward.
This week - with the arrival of March house price data - we found out that residential prices are now rising at their fastest clip since 1988!
If you recall, the original article concentrated on two primary tools for family assistance: first, the outright no-strings attached provision of a gift. Second, the interest free loan which is not required to be repaid unless the property is sold (this option is favoured by advisers because it offers "asset protection" - if there is a divorce the money does not leave the family which put up the funds in the first place).
Before we get to the new ideas from readers, let's deal with a few criticisms the piece provoked. Some readers thought there was insufficient attention paid to how much lower interest rates are now compared to what they were a generation ago. Certainly, rates are much lower today, but keep in mind rates can move in either direction and our cheap mortgages will not be with us forever.
Readers also suggested that homebuyers today are buying a lot more in terms of amenities: multiple bathrooms etc. Yep, it's true, a fair point.
Some readers were also doubtful that customised legal agreements covering inter-family loans would stand up in court. But advisers confirm they are legally enforceable and if you have any doubts then have the deal looked over by a family law specialist.
One thing became very clear from reader responses: there is no easy way to enter this area and money dealings between parents and their offspring present a clear danger to family harmony.
Some readers refused to take money offered by parents on the basis that they should make their own way in the world. One correspondent who detailed a clear case of family favouritism recalled how a sibling had received money from his parents while he had not.
One woman recalled how the offer of an interest-free loan from her parents-in-law triggered a family split. Here's what she said: "We politely rejected the loan and borrowed from a bank instead. My parents-in-law were very angry at the rejection, and we were very hurt that they considered such onerous conditions fair, when their express wish had been to help us. The rift between my spouse and his parents was never repaired.".
Nonetheless, many people will alway want to help with their kids buying a house. So let's look at the other ideas and see what top advisers have to say about the choices.
* The most popular appears to be the idea of a parental guarantee on the mortgage. Under this arrangement parents can typically put up equity in their own home as collateral and then guarantee the bank the mortgage their kids have taken out will be paid back if there are difficulties down the track.
Parents often move to guarantee just a portion of the loan so that mortgage insurance need not be paid by the borrowers - mortgage insurance costs may kick in if the loan is worth more than 80 per cent of the value of the house.
The ultimate potential cost of guarantor arrangements is if the borrowers (your children) default then their house might have to be sold and if the sale did not cover the loan from the bank then your home might have to be sold. Lending statistics show this is a very unlikely outcome but not impossible.
As one reader said: "It's worth the small risk to help your children without the need to give them money or lend them money."
Importantly, advisers suggest parents should have an exit strategy when they become guarantors. Typically where the guarantee arrangement was just to avoid mortgage insurance costs then after a few years (with the value of the house higher and the mortgage shrinking) the bank should allow the parents to extract themselves from the guarantee.
* This is a variation of the basic interest-free loan. The idea is to make it a loan which is secured with a mortgage on the property. The loan is repayable "within a number of days of demand" rather than on the sale of the property. As one reader explained: "The benefit of having the mortgage is that as a secured creditor not only do you get to have priority ahead of other interests such as an ex-spouse but also if your child goes broke, you rank as a secured creditor." Advisers suggest in this scenario the mortgage should be registered if possible or you could make it a binding financial agreement.
* Several readers recommended a dollar-for-dollar approach. One reader who had done this successfully on three occasions said: "I match a 10 per cent deposit so they save 10 per cent - if they have not paid the loan back by the time I die then it is taken into consideration in the distribution of my estate." Advisers suggest this is a perfectly good idea, providing you are fortunate enough to have the funds to be able to offer the same arrangement to each child.
There are many more variations, in fact we could do a small book on it all.
And then of course there is the option exercised by reader "Barbara A", who said: "We have helped our kids with a no-strings-attached gift when they bought a house. I guess if you were very wealthy you may have to think about protecting the gift from the spouse in case of divorce, but if it is just to fatten up their deposit and give them a cushion of protection I don't think it's worth the bother."
Originally published as Parent pitfalls: more tips on helping kids buy homes