Great news! A brand new home loan from one of our lenders is giving parents the opportunity to help their children to buy a home and avoid some of the associated risks that come along with being a guarantor. You could also stand to make a profit as well!
How does it work?
Well, it works in a similar way to a gifted deposit in that you cover the 9-10% of the property value required for your child’s deposit but instead of simply giving it to them, you lend it to the lender at an interest rate of your choosing (at least 50 basis points above the consumer price index or above 1.1%).
The lender will then lend the money to your child at a “loaded” rate or around 2-3 percentage points at the interest rate you decided upon. For example, if you decided to lend the money to the bank at an interest rate of 3%, the lender would lend your money to your child at a 4.75% interest rate, generally speaking.
As your child makes their repayments, the lender earns 4.75% in interest per annum on their repayments and you earn 3% per annum. Think of it as an investment in your child’s future except you see the return every year!
Protect your property
What else makes this loan so unique is that there’s no bank guarantee! That means unlike a guarantor loan, which requires the parents or relative to put up part of the equity in their home as security (depending on how much of the property value your child wants to borrow), this loan is secured on a second mortgage on your child’s house.
Think of it as if you are the bank and the mortgage is officially “registered” with the lender. So unlike gifting a deposit, you earn interest on the amount your child is paying back, receive statements from the lender that tell you whether repayments on the loan are being made on time by your child and have a legal right to access the money at all times.
In the event that your child runs into financial difficulty and cannot meet their repayments, your property and credit file are protected!