This is how parents can help with real estate financing

For Millennials and Generation Z, the dream of owning a house is associated with many hurdles. Real estate prices are not the only thing staying at a stubbornly high level, especially in the German metropolises. Interest rates have also risen to such an extent that the monthly repayment installment is hardly manageable for many. It is all the more important to bring as much equity as possible into real estate financing in order to push interest rates down as much as possible. If you don’t have the wherewithal to do this, you can often only afford to own your own home when you inherit it – as long as you’re lucky.

However, parents can also support their children during their lifetime to get into their own property. On the one hand, this can be done with a donation – the children can then use the money for equity in real estate financing. But there are also a number of options that parents can use to help their children buy a house.

Variant 1: Deposit parental home as security

If the parents already own their own home, they can use it to vouch for their children’s loan. At least 50 percent of the parents’ property should be paid off. The principle works like this: A certain percentage of the parents’ property, for example 100,000 euros, or for free distribution is deposited with the bank as security. This then counts the value as equity on the real estate financing. The advantage: In this way, the parents do not become borrowers themselves and do not have to give up any liquidity that they may have saved for their own retirement provision.

However, there is also a catch: If, in the worst case, there is actually a default, the children’s house must be foreclosed on. If the bank does not receive the desired proceeds, it can use the parents’ property. Before that happens, however, banks are willing to talk about covering the loan debt in other ways. “At best, the children communicate their financial misery to their parents in front of the bank,” recommend the experts at the credit broker Dr. Small. “The trust and general relationship between parents and child should be great and open.”

Variant 2: Parents take on a new mortgage

If the parents find it too difficult to secure their children’s loan with their own property, they can also take out a mortgage themselves. They take out a mortgage on their property. The advantage: the parents can repay the loan themselves. They can still agree with their children that they will pay off the installment for the loan to them. The disadvantage: This variant can incur additional costs, for example the costs for entering the mortgage in the land register including notary costs and the interest on the loan. And: If your own children are no longer able to pay, the parents’ credit burden to the bank remains.

Variant 3: Hire purchase between parents and child

If the child is in such a bad financial position that it cannot get a loan from the bank, the parents can also finance the house and let the child move in as a tenant. The child pays off the property in installments to the parents via a kind of hire-purchase. Parents can also wait until the debt has been paid in full before registering their children in the land register.

What many people don’t know is that the 60+ generation is a popular customer for many credit institutions because of their reliability. Thanks to their secure – and often good at the end of their career – income, they often even get particularly good interest offers. However, it should be noted here: If the parents die before the financing is paid off, the blame is transferred to the children, provided they accept the inheritance. If they cannot pay off the installment, the house goes into foreclosure.

Variant 4: Give or borrow money

There are also a number of things to consider when it comes to the donation mentioned at the beginning. If the parents have savings, they can of course transfer these to their child for real estate financing. However, you should note the exemption limits for gifts. This is between parents and child at 400,000 euros.

Anyone who would prefer to lend their children the money – with or without interest – can set up a loan agreement. If the bank knows about this, a loan comparison is often even mandatory. In addition, “an interest-free family loan is also viewed as a debt and can worsen the interest rate on mortgage lending,” the Drs. small experts. Therefore, parents and children should think twice about whether to declare the family loan to the bank as such.

.