Consider this before giving your kids money for a home deposit…
As costs to enter the housing market continue to skyrocket, 4 in 10 first home buyers aged 25-34 expect to ask their parents for help entering the market. But whether you’re gifting or lending, there are important financial and legal factors to consider to protect both your family’s interests and your children’s borrowing power.
- Impact on Borrowing Power
If you choose to loan money, be aware that banks will factor this debt into their assessment of your child’s ability to repay a mortgage. For example, a $100,000 family loan could reduce their borrowing capacity by up to $270,000. Even a small loan could have a considerable impact on what they’re able to borrow.
- Loan or Gift
Gifting the money to your children may avoid any impact on their borrowing power but it carries other risks. While gifting money might seem easier, it can become problematic if your child’s relationship ends. In the event of a divorce or separation, gifted funds could be seen as part of the dividable assets. Structuring the money as a loan might protect it in the case of a divorce but this may also limit your child’s ability to secure a mortgage, as banks treat loans from family like any other debt.
- Legal Protection
Some parents may implement binding financial agreements to protect family money in the event of a separation. These agreements ensure that, in the case of a divorce, the funds are safeguarded and returned to the family. However, these agreements can be costly, depending on complexity.
- Your Own Financial Security
Finally, consider how much you can comfortably give without negatively effecting your own financial future. Loans add complexity, and gifts, if not structured properly, can introduce risks to your retirement plans.
Our experienced Financial Advisers can assist you in weighing up these factors carefully along with any other considerations that may impact you or your children. By doing so it will help ensure your children enter the property market in the best way possible.
