Helping a loved one buy a home

Potential new homeowners are facing different challenges than the generation before them. To make matters worse, high inflation and rising rental prices are making it harder to save for a down payment.

For Millennials, who are in their prime home-buying years, these obstacles of housing affordability are leaving many would-be buyers priced out. From 2014 to 2022 millennials made up the largest share of new home buyers. In 2023 the share has declined with millennials making up only 28% of first-time homeowners.¹

Fortunately, family members can play a key role in helping to put a loved one’s dream of homeownership back within reach. In fact, financial assistance is becoming somewhat common for younger buyers. For example, a 2023 NAR report showed 23% of younger Millennials used a gift or a loan from a loved one to purchase their home.¹

You can potentially leverage your portfolio to assist the next generation in affording a home without triggering capital gains, interfering with estate planning or gift taxes. Here’s how:

You may be able to help your loved one secure a more competitive rate on their home loan based on the eligible assets held in your Morgan Stanley brokerage account. Through relationship based pricing, children and other eligible family members have access to preferential rates that they may not be able to receive on their own. Your loved ones do not need to have a Morgan Stanley account to receive this benefit.

One of the challenges of buying a home is generating enough cash for a down payment. There are several options available when it comes to helping your children purchase a home; you may be most familiar with co-signing on the loan and gifting or lending the down payment. But you may have other options.

One approach to consider, especially in competitive real estate markets, is the use of a securities based loan. This uses the value of eligible assets in your Morgan Stanley brokerage account as collateral for a line of credit that you can draw on to help them with the purchase without having to liquidate assets for a down payment or to make an all-cash offer. This can provide an efficient way to assist with a down payment or purchase, while keeping your investments intact and potentially deferring some of the tax implications associated with selling assets. Once the home purchase has been finalized, you and your loved one(s) can work with your Financial Advisor to determine the optimal long-term financing strategy for the property.

Another strategy that may help reduce or eliminate the need for a down payment is to use the pledged-asset feature. Here, you also borrow against eligible assets in your Morgan Stanley brokerage account to decrease the loan-to-value of your loved one’s mortgage, with the potential to finance up to 100% of a home’s purchase price, which can lead to a lower rate.

Whether it’s to help fund a down payment or make a cash offer, borrowing against eligible securities can in certain situations be mutually beneficial for you and the family member buying a home. Because you are neither selling assets nor gifting them, capital gains may potentially be avoided. And since you are not deviating from your investment plan, your assets may continue to grow and potentially generate income.

Borrowing against securities may not be appropriate for everyone. As with other loan types, there are risks. A sharp drop in equity prices could trigger a maintenance call. This means that the borrower may need to provide more capital immediately or sell the investments securing the loan, and the lender may sell securities at its own discretion.

There are many home financing options when considering purchasing a home property. Your Morgan Stanley Financial Advisor can connect you with a Private Banker who can help you navigate the right strategy for your financing needs.

1. How can my credit history help my loved one get better rates?
2. How do I preserve my investment strategy while pledging securities to my loved one?
3. Am I financially liable for my loved one’s home loan?

1. The 2023 Home Buyers and Sellers Generational Trends Report. National Association of Realtors.