A mortgage is arguably the biggest purchase you’ll ever have to repay. And if you’re currently watching your child repay a mortgage, you may be wondering if this is something you can help them with.
The bank of mum and dad has become one of the most common ways young Australians are able to get a foot on the property ladder. Whether you’re hoping to help with just the deposit or want to know more about fully servicing repayments, there’s a lot to know about paying off someone else’s mortgage.
There are three main ways a parent may be able to pay off a child’s mortgage:
- Lump sum payments
One of the easiest and most simple way you can help another pay off their mortgage is by providing them with lump sum payments. The mortgage holder can then put these funds directly to their ongoing repayments and you do not have to have the mortgage linked to your credit history at all.
If you opt to provide your child with lump sum payments towards their mortgage, the child may want to consider putting these into an offset account. This home loan feature can help the borrower ‘offset’ the cost of their mortgage. Meaning, any money that sits in this nominated bank or savings account is subtracted from the total loan amount owing, reducing the ongoing repayment amounts.
- Joint mortgage applications
If you want to be directly involved with repaying your child’s mortgage, you may want to consider a joint mortgage application. This will see your name added to the mortgage, with the responsibility of servicing the loan falling on to your child and your shoulders. You’ll be able to nominate your bank account as the account the lender deducts for mortgage repayments.
Of course, you’ll need to be prepared emotionally and financially for this significant responsibility. Your personal finances and credit history will be assessed against the lenders’ eligibility criteria. It will also be reflected on your credit history, meaning if the worst were to happen and you both could no longer service the loan, it will hurt your credit score and potentially your relationship.
- Going guarantor
If you’re looking for a way to partially help a child with their mortgage without being responsible for every monthly mortgage repayment, you may want to consider going guarantor.
A guarantor is a nominated third-party (usually parents or a family member) who agrees to take responsibility should the applicant default. Typically, they will offer up security, such as property, to help the applicant gain mortgage approval.
In this scenario, the parent would agree to go guarantor on the full mortgage, or just the deposit to help the child meet loan-to-value ratio criteria. Having a home loan deposit of at least 20 per cent secured through a guarantor can help borrowers to not only avoid paying for lender’s mortgage insurance, but more likely be offered the most competitive home loan rates. Unlike co-signing on the child’s mortgage, you will then only be financially responsible in the event they default on the loan.
Before making any financial decision to assist your child with their mortgage, it’s worth having strong communication about how they will service the loan. Unless you’re planning on gifting them with money for the loan, any other option involves a level of financial risk on the parent.
It may be worth speaking to a financial advisor as well before making any commitments. You may also want to speak to a broker with your child about their options for more affordable property and/or home loans if money is a worry.
Guarantor home loans