Lending your child a helping hand

With the ever-increasing price of property, younger people are finding it harder and harder to break into the market. Your financial support can make a big difference, and there are a number of ways you can help make their dreams a reality.

Can I loan my child money for a deposit?
The most obvious way to help your son or daughter get a foot in the door is to help them with their finances directly. Dipping into your savings or taking out a personal loan are the two most obvious options, especially if you’re confident they will use the money responsibly. One strategy is to offer to loan them the money for the deposit. The bank or lender will still need to assess whether they are suitable for a mortgage, but a deposit can go a long way to success. If you’re unsure how much you can afford to lend, use a budget calculator to help you do the numbers. That will put all your expenses and income into an easy-to-understand format. If you want to borrow money for the loan, a borrowing calculator can give you an indication of how much you may be approved for. It’s not a guarantee, but it’s a good indication. Organising a low-interest personal loan can be simple, especially if you have a solid credit history.

Should I refinance my current loan?
Refinancing a loan can be a good way to free up money. Giving your current mortgage a health check from time to time is always a good move. You may discover there are better features available today than there was the last time you looked at your home loan. The mortgage that helped you purchase your first home may not be your best option now, all these years down the track. Refinancing can also give you more money in your pocket. It may result in a better interest rate or smaller repayments. While it may seem easier to keep your home loan where it is, it is never a good idea to remain complacent. You could miss out on thousands of dollars in savings and prolong the life of your current loan. You may also want to consolidate all your loans into one mortgage. That, too, can save you a lot of money. Refinancing can also help you identify how much equity you have in your current mortgages.

What about helping my child out with a family pledge loan?
If you don’t have spare money or are worried about taking out another loan, a family pledge home loan can be a good option for your children. Family pledge mortgages allow you to use the equity in your own home to act as a guarantor for someone else, including your child. Equity is the difference between what your house is worth, and how much you still have to pay off. You can use that amount, or part of it, and act as a guarantor for your child’s mortgage application. Most banks only lend up to 80 per cent of the market value, so take that into consideration when calculating your equity. Your property will act as the deposit, which means your child could borrow up to 100 per cent of the value of the home they are looking to purchase. However, some banks and lenders prefer to lend against an investment property, and different banks and lenders may have different equity level requirements.

Are there risks being a guarantor?
While helping out a loved one is rewarding, there are always risks when you mix money and family. Being a guarantor through a family pledge loan or lending money directly is no exception. Relationships can become strained, especially if you are a guarantor and your child struggles with mortgage repayments. You may be putting your home at risk, which is why it is important to make these decisions with as much information, and as much objectivity, as possible.

Do I have to deal with a bank?
Not at all. Banks are not the only lenders that offer family pledge loans and allow you to act as a guarantor for your children. Award-winning lenders such as Mortgage House have helped Australians achieve homeownership for more than 30 years and without all the jargon and delays.  

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