It makes grim reading for both generations and it is little wonder that many parents feel compelled to help, but they need to think carefully before going ahead.
Everyone’s circumstances will differ but as a general rule, parents should avoid dipping into their retirement funds to help their children. A lot of things can go wrong. If you are handing over money, even as a loan, you should be able to stand losing it if the worst comes to the worst.
You should also be certain that you are helping for the right reasons. If your children are financially responsible and can afford to repay a mortgage but just can’t raise a deposit then it may make good sense to help them.
However, if they haven’t been sensible with money then you may need to make some checks.
For example, if your children can’t get a mortgage then you
need to find out why.
Get them to check their credit rating and show it to you. Ask to see pay cheques and bank accounts if necessary. This may seem severe but there’s a lot at stake. Think of it as tough love.
After all, if they’re struggling financially already, giving them the responsibility of a mortgage they can’t afford will only add to their problems. It may be that helping them to pay off credit card debt may be more of a priority.
Once you decide to go ahead there are various ways you can help. Most parents do so by making a contribution towards the deposit for a mortgage. You could simply give them the money, but if you want it to be repaid at some point in the
future, you should draw up a written agreement so everyone knows where they
stand.
This is important because memories get blurred over time.
The agreement should include details of the repayment schedule, preferably with a ‘promissory note’ so it’s a proper formal arrangem
ent. You may also want to draw up a deed of trust outlining how much you have contributed to the purchase
so you can get your money back when your child sells the property in the future.
If you are buying a home and renting it back to your children, make sure you can
meet the repayments if they can’t. Otherwise, you may have to sell at a loss.
If you don’t have enough money to help, you could borrow money using your own home as security, but this carries considerable risks as you could lose your home if you cannot meet the repayments.
You could consider a guarantor mortgage. This would enable your income to be taken into account when assessing your child’s mortgage. However, you would be liable for the repayments if your child defaulted. The same would apply to joint
mortgages.
It’s only natural that parents should wish to help but they must do so for the right
reasons and in the right circumstances. If you get it right it could help your
children build a brighter future; if you get it wrong, it could lead to financial hardship and even family splits in years to come.
Please contact us if you would like more information about the issues raised in this article or any aspect of buying and selling a home.
