As house prices rise across Australia, more and more clients seek advice on ways they can help their children enter the property market. In fact, reports suggest up to 80 percent of parents are prepared to provide some sort of financial support.
But What is the Best Way to Help?
There are several ways parents can give their children a helping hand. Below, we explore some of these options and discuss the risks associated with each:
Providing a Cash Gift
One of the most simple and straight forward ways for parents to help children onto the property ladder is by gifting them cash towards a deposit.
Many parents find this option appealing as they are able to give what they can afford.
However, things get tricky when you gift the child the entire deposit. This is because some lenders want proof the child is able to both save money and service the loan. A monetary gift will do little to prove either. To combat this, some lenders may request the money remain in the child’s bank account for a set period. They may also ask for a declaration from the parents stating the money does not need to be repaid. Each bank has different lending criteria so it is best to speak to us if you are considering a cash gift to your child.
Acting As Guarantor
If parents are looking for a way to help their children without directly handing over cash, they can consider acting as a guarantor on their child’s mortgage. By acting as guarantor, the parents’ income and property is considered security, allowing greater borrowing capacity. However, the guarantor’s role is also to service the loan should the borrower default on their repayment.
Unforeseen events such as unemployment, illness or marriage breakdown has seen many guarantor parents forced to repay their child’s outstanding debts and this is something they must be prepared for.
Some lenders allow the guarantor to nominate a certain amount of the loan only – but this may vary among lenders. The level of equity required to go guarantor will also vary from lender to lender so it is a good idea to chat with us before proceeding with this option.
Buying in Partnership
Parents may consider buying a property together with their child and sharing the cost of repaying the loan. This approach allows the child the option to buy their parents’ share of the home when they become more financially secure.
However, buying a home in a partnership comes with risks. Like any partnership, parents and children need to document their plans for buying a home together. It should include things such as managing unforeseen repairs and what to do if one party wants to undertake renovations or withdraw equity for personal reasons.
Granting a Loan
Finally, there is also the option of providing a loan to your child. This is usually a supplementary loan, with the remainder coming from a financial institution.
At the very least any loan and its terms should be documented, and agreed, between both parent and child. When done properly, this is often considered one of the least risky methods of helping a child into property.
The way you choose to help your child will be ultimately driven by factors such as your parenting style, relationship with your child and your financial situation. By being aware of your options and the risks associated with them, you’ll be better placed to make a well-informed decision.
If you’re considering offering a helping hand to your child, give us a call on (02) 9908 9888. We will take a holistic look at the finance options for you and your child and provide some recommendations appropriate for your family.
Patricia Williams is a credited representative (CRN 400458) of BLSSA Pty Ltd (Australian Credit License No. 391237).