Parental Support for Home Purchase – How to Help Your Children Enter the Housing Market
Many young people need help from their parents to be able to buy their first home. Parents can contribute in several ways, such as acting as a guarantor, becoming a co-borrower or giving a cash gift.
One in three first-time buyers depend on help from their parents when they need to buy their first home
High property prices and equity requirements mean that many people cannot afford to buy a home on their own.
All banks in Norway must follow the mortgage regulations. This means that the bank must assess both ability to pay (such as income), how much debt the person who needs to borrow money has, and how much money in equity one has. Among other things, you must as a general rule have at least 10% equity, and total debt cannot normally exceed five times annual income.
These are tough requirements to meet for many young people, who therefore often need help from parents to get a mortgage to buy their first home.
Parents can contribute in several ways. Some choose to provide security in their own home and become a mortgage guarantor, so that their child can get a loan with lower equity. Others choose to act as a co-borrower if their child does not have a high enough income to get a mortgage alone. Many parents also help through cash gifts, advances on inheritance, or savings for their children over time.
Which solution is most suitable will vary from family to family. It depends on both the child's and the parents' finances.
Watch and learn
Mortgage guarantor or co-borrower?
What is a secured guarantee?
What should you consider if you need to give a cash gift or inheritance?
Security in parents' property
Many parents choose to use their own home as security for their child's mortgage. This is because they have often paid off large portions of their own loan and therefore have available security that the bank can use.
This is called acting as a mortgage guarantor.
This can make it possible for the child to obtain a loan even if the equity is not high enough, and is one of the most common forms of parental assistance for home purchases.
Acting as a guarantor is at the same time a significant vote of confidence. You are responsible for the portion of the loan for which you provide security. If your child is unable to repay the loan themselves, you may become liable for covering the costs.
In addition, being a guarantor also affects your own financial freedom, because the portion of the loan you guarantee is assessed as debt. This can have implications for your opportunities to move house, buy a cabin or help more children enter the housing market.
You remain a guarantor until the borrower can take over the loan alone, usually when it represents 90% or less of the property's value. This happens when your child pays down the loan, when the property increases significantly in value, or a combination of both.
Parents can take out a loan together with their child
If the child does not have a high enough income to obtain a mortgage alone, parents can become co-borrowers. For some families, this is the solution that makes home ownership possible.
As a co-borrower, you take out the home loan together with your child and become responsible for ensuring that the entire loan is repaid.
This means that:
- You share responsibility for the loan
- If the child is unable to pay, the co-borrower will have to repay the loan.
- It may affect the parents' own borrowing capacity
As with being a guarantor, it is important that you as a co-borrower are aware of your child's ability to pay. You must be confident that the loan will be repaid, so that you do not end up having to pay it yourself. It may be wise to create an agreement about what happens if your child is unable to pay for a period.
Cash gifts and advance inheritance
Another common way to help children into their own home is to give a cash gift towards the equity.
This can be a good solution if the parents have the financial means and wish to contribute without providing security in their own home or being a co-borrower.
When you give a cash gift, you should always document the gift in a deed of gift. A deed of gift should contain who is giving and receiving the gift, the amount being given and where the money comes from.
A gift and an advance on inheritance are not quite the same thing. An advance on inheritance is something you give as part of a larger inheritance settlement, and is money that will be deducted from the inheritance settlement later. The child receiving the inheritance must be informed of this when the inheritance is given. All heirs should be informed, so that conflicts can be avoided at a later stage.
Like a cash gift, inheritance should also be documented in writing. A plan should also be made for whether the other heirs must receive a corresponding amount.
As a customer of DNB, you get free access to templates for deed of gift and advance on inheritance from our business partner, Ally Advokater.
Private Loan from Parents
An alternative for helping your child with the equity is to provide a private loan.
This may be relevant if you do not have savings available, or do not wish to use your home as security.
Even though the loan is kept within the family, it is important to do it in a proper manner.
You should therefore always create a written agreement that describes
- How much is being lent
- How the loan must be repaid
- Whether interest must be paid
A clear agreement provides predictability and reduces the risk of misunderstandings later.
This is what you as a parent should consider:
- Parents should be aware that this is debt that must be repaid and that it will affect the loan amount in the same way as other debt.
- It is important to remember that both the loan and any interest rates must be reported in both parties' tax returns, with a written repayment agreement attached as documentation.
- As a parent, you should carefully consider the consequences before taking out a loan to support your children, as this may affect your own finances and future opportunities.
Start Early: Saving for Children
One of the best ways to help your children enter the housing market is to start saving early. Even small monthly amounts can grow substantially over time when the money is left to accumulate.
By setting up a fixed savings scheme whilst your children are young, you can gradually build up funds that can later contribute towards a deposit for a home. The savings can also be useful for other major expenses along the way, such as a driving licence or studies.
When your children are older and have their own income, it may be wise to encourage them to save in a BSU (Home Savings Scheme for Young People). BSU offers both favourable interest rates and tax relief, and is one of the most effective ways young people can save towards their first home.
How we make it easier for you
The Ung (Young Adults) billion
At DNB, we have what we call the Ung (Young Adults) billion. This gives us scope to say yes in more cases for young home buyers. Perhaps you have slightly less equity, or need us to take a holistic view of your finances? We can help you with that.
Get help entering the housing marketBuying a home for the first time?
With a first home loan, you get our lowest interest rate and advisory services tailored to first-time buyers.
First home loanBuying a home with a friend
Many people choose to buy their first home with a friend.
Friend loan