Entering Into a Shared Equity Agreement with Your Child: Pros and Cons
As a parent, you want what`s best for your child. This includes helping them achieve financial stability and security. One way to do this is by entering into a shared equity agreement with your child. But what exactly is a shared equity agreement, and what are its pros and cons?
What is a shared equity agreement?
A shared equity agreement is a legal contract between two parties – in this case, a parent and their child – in which they agree to jointly own a property. The agreement typically stipulates that the child will put up a portion of the down payment or purchase price, while the parent will contribute the rest. In return, the child would be entitled to a percentage of the profits when the property is sold or refinanced.
Pros of a shared equity agreement
1. Helps the child become a homeowner: A shared equity agreement can help your child get on the property ladder sooner than they otherwise would be able to. This can be especially important in today`s housing market, where prices continue to rise.
2. Provides financial assistance: By contributing to the down payment, parents can help their child save money on mortgage insurance or other expenses associated with homeownership. This can make it easier for the child to afford the monthly mortgage payments.
3. Can be a good investment: If the property increases in value over time, both the parent and the child could stand to benefit financially from the shared equity agreement.
Cons of a shared equity agreement
1. Can strain the parent-child relationship: Entering into a shared equity agreement can be a delicate matter, particularly if it hasn`t been discussed in advance. If the child is unable to keep up with mortgage payments or decides to sell the property before the agreed-upon time frame, it could lead to tension between the parent and child.
2. Could impact eligibility for other loans: A shared equity agreement could impact the child`s eligibility for other loans, such as student loans or business loans. This is because the shared equity agreement counts as a liability against the child`s credit score.
3. Not a guarantee of financial gain: While a shared equity agreement could potentially be a good investment, it`s important to remember that there are no guarantees in the real estate market. There is always a risk that the property could lose value, or that unforeseen circumstances could arise that would make it difficult to sell.
In conclusion, a shared equity agreement can be a good way for parents to help their child become a homeowner while also making a potentially profitable investment. However, it`s important to carefully consider the pros and cons before entering into such an agreement, and to discuss the matter openly and honestly with your child. With proper planning and communication, a shared equity agreement can be a win-win for everyone involved.