Keep it in the family
Many first-time investors are eager to buy into the property market. Some young investors may need financial assistance, often turning to family for a helping hand.
Assisting family members in the purchase of a home isn’t a new phenomenon, but it’s becoming increasingly popular. Some reasons for this include:
- Young adults are joining the workforce later as they study longer
- People are marrying later
- High property prices have out-priced many first-time investors
Although it often makes sense for family to help each other out financially, conflicts can arise without adequate communication and attention to detail.
Helping the kids
Parents need to balance their desires to help their children buy a property with a measure of caution. While helping out family in times of need can strengthen the ties, it also has the potential to stretch them to their limits. So avoid long-term damage to family relationships by ensuring you are aware of potential pitfalls before getting involved with your child’s finances.
Going guarantor
If you’re considering going guarantor for your child, the benefit for you is the pleasure of knowing you have enabled your child to buy his or her own home. However, keep in mind your own assets may be at risk if your child’s mortgage defaults and you can’t meet the repayments yourself. After all, as guarantor you agree to take responsibility for your child’s debt. For this reason it’s crucial you can trust their commitment and ability to service the loan.
Before consenting to go guarantor, consider the following:
- Can I rely on my child’s ability to service the loan?
- What is the term of the loan?
- What is the total sum of the loan?
- Will going guarantor have any effect on your personal financial status, such as your ability to borrow or gain credit?
- Under what circumstance will the loan be deemed to be in default?
- Is it possible for further advances on the loan to be made without your knowledge or consent?
- What are the penalties incurred in the event of a default?
Lending a hand
Lending money directly to your child means you decide the conditions of the loan. Additionally, many parents choose not to charge interest to help out even more, but be aware this may remove any incentive to pay back a loan quickly.
Without formalising loan terms your child may become complacent about making regular re-payments. To help avoid this, talk to a solicitor about drawing up terms and conditions before offering a loan. While this can be an expensive exercise, for the sake of preserving family relationships and avoiding financial heartache, it could be well worth the cost.
Gift of love
If you’re feeling generous, gifting is another option to help out with a deposit or mortgage repayments. Remember, depending on your age and situation, gifting may impact your eligibility for social security payments, so check this with your financial adviser.
Resentment issues can arise if you have children and appear to help one more than the other. If you’re not going to give your children equal help purchasing a property, it might be wise to take this into account when preparing or reviewing your will.
Investing with siblings
Another way for first-time investors to buy into the property market is to invest with a brother or sister.
By purchasing property with siblings you increase your buying power by combining deposits and income. In theory (and often in practice) this is a great idea, but you need to know what you’re doing, so consult an expert prior to making any commitment.
Before considering a combined investment, answer the following:
- Do we get along and are we capable of dealing with disagreements in a calm and rational manner?
- Can we rely on each other not to default on regular repayments?
- Do we have the same agendas? For example, are we buying an investment property or a home?
- Have we agreed on how and when we should sell?
- Can we rely on each other to share the work of owning a property?
If you answered ‘yes’ to these questions - great, but you should still consider having a legal agreement drafted by a solicitor if you choose to proceed, detailing:
- Exit strategy conditions, covering various situations where one party wants to sell or is unable to meet repayments.
- Each person’s contribution to the deposit and mortgage repayments.
- How the property will be valued if one person doesn’t want to sell.
Also, when investing with a sibling there are two main legal options available: Joint Tenants and Tenants in Common. Both are viable but it’s important to realise their differences.
For example, under a Tenants in Common agreement, if one person dies their equity in the property goes to their estate whereas, in the case of Joint Tenants, the entire value of the property goes to the surviving sibling.
Each scenario has the potential to cause family rifts so seek legal advice, ensuring each party is fully aware of any implications before they agree to either.