Soaring property prices and affordability issues now means that our younger generation are routinely finding themselves in a position where they are unable to afford to buy their own home, unless they get some financial help from the bank of Mom and Dad.
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When it comes to your family finances, the key question many parents ask is whether they should consider helping their kids to buy their first home, and if so, what are the pros and cons of that decision?
Working out your finances
If you are a parent with adult children, it might be that you have accumulated a bit of spare cash and could potentially afford to use some of that money to help your kids get that all-important first step on the property ladder.
You could take the view that if you are intending on leaving your assets to your children in your will, you are merely giving them what they will get at some point in the future. It can still be a dilemma however, as you don’t always know how much of your money you will need to see out your retirement.
Many of us are living longer, which means that we need more cash to be able to afford our retirement, which could conceivably last 20 years or more, relying on your investments to fund your lifestyle once you stop working.
It therefore makes sense to seek some professional advice regarding your financial position both now and in the future, so that at least you fully understand the implications of helping your kids buy a property, by giving them or lending them some money.
A gift to set them up for a life of home ownership
It is estimated that at least a quarter of millennials, are still living with their parents by the time they reach their 25th birthday, so to help them move out and avoid some high rental prices, you might want to consider providing them with enough money to afford the down payment.
You could take the very generous step of gifting this down payment to them. Mortgage lenders normally allow borrowers to use money that has been gifted to them as a down payment, although you might find some lenders ask for a declaration to state that the money is a gift not a loan, so that there is no chance of a claim on the money once it has gone into the property.
Provided you are happy to give them some or all of their potential inheritance early, this could be a good way of getting them started. You should be aware that if the gift exceed the IRS gift tax exclusion limits, you might need to file some extra tax paperwork so that there are not any potential issues.
Alternatively, you could offer your children an interest-free loan which has to be repaid when the property is sold, although this will require the services of a lawyer to get an agreement written up that works, and you may have issues with the mortgage lender, who might not like the fact that you have a call on some of the potential equity in the property.
You will have to decide what your financial position dictates you can do and then consider how best to give them the opportunity to buy their own, with your help.
Becoming a co-borrower
Another potential option open to you as a parent, is agreeing to co-sign the mortgage, if your adult child’s income is not sufficient on its own to allow them to get the amount of loan they need.
This strategy clearly has some risks attached to it, as you are assuming a level of responsibility for the mortgage payments and will have to pick up the tab if your child becomes unable or even unwilling to pay their share.
If you are in a financial position where you have enough income to afford to pay the extra mortgage payments in addition to your existing financial commitments, then becoming a co-borrower is a potential option, but one that you should consider very carefully and take advice on, before agreeing to help your kids in this particular way.
In terms of answering the question of whether you should be helping your kids to buy their own home, only you can answer whether your finances are up to that sort of generous gesture. After that, it is a case of working out the best way of doing the good deed of helping them onto the property ladder.
Amber Hope is a keen article writer who lists writing as one of her hobbies. Her informative articles appear on lifestyle, parenting and personal finance blogs around the internet.