It’s nearly Mother’s Day, which is a great excuse to spoil our mums and show them how grateful we are.
It’s also a good time to talk about how to work together, if we are mixing mortgage with family. They say business and family shouldn’t mix. But there are ways to get the balance right so that everyone is happy.
For as long as property has been bought and sold, older generations have been helping their kids buy property. Now, with record high property prices, that support is more relevant than ever.
Ways family can support one another with a mortgage
There are different ways family can support one another to enter the housing market.
One way is for parents to buy their children a house. This property could also be the parents’ investment property.
Another way parents can help kids purchase property is by becoming a guarantor. A family guarantee is when a family member, typically mum or dad, offer equity as security for the loan. For example, if you need an $80,000 deposit, plus $15,000 stamp duty to secure your loan, $95,000 may be taken as a loan over the guarantor’s house.
The benefit of using a guarantor is that you can get into the housing market without the deposit, and without paying Lender’s Mortgage Insurance (LMI).
A family guarantee can work the other way too. Lenders often restrict borrowing power as people age, due to decreased earning capacity. Adult children can support their ageing parents by buying them a house as a second property, or as an investment. Alternatively, adult children might use their own property as a guarantee for their parent’s mortgage.
The third possibility is that families buy property together. The lender may restrict this arrangement to parent-child relationships, though exceptions are sometimes made. In this situation, the loan may be split into separate accounts, so each party can make the repayments separately.
There are risks to buying property together, or becoming a guarantor. The guarantor will be liable in the event of a default on the mortgage, and in the worst-case scenario a guarantor may lose their own property, though the lender will explore every avenue before this takes place. For this reason, the lender will do a full assessment of the guarantor’s financial position as part of the approval process.
There are also emotional risks to mixing mortgage with family. One obvious risk is the impact of stress on everyone involved if repayments are difficult to make. Stress can also increase due to misunderstandings and miscommunications.
How to get the balance right
If you do decide to take out a mortgage with family, buy property together, or involve a family member as a guarantor, it’s wise to take these steps to ensure the process runs smoothly.
- Create clear channels for communication: Set up regular meetings so all parties have the chance to air their concerns, and talk about the practical and emotional aspects of the arrangement.
- Get legal and financial advice: Even though it’s family, it’s prudent for all parties to get independent legal and financial advice before entering into an agreement.
- Involve your mortgage adviser: Ensure all parties meet with your Smartline Adviser to discuss how the family mortgage is going to run. Your adviser has all your interests at heart, will ensure you prepare for any risks and will help you decide if each option is right for your circumstances and requirements.
Book a chat with your Smartline Adviser to discuss your options. And have a Happy Mother’s Day!