The Bank of Mum and Dad became one of Australia's top 10 lenders last year, with more than half of young Aussies seeking financial help from their parents to buy their first home.
If you want to help your kids take their first step on the property ladder, there are more ways to do it than just lending them money and hoping they'll get around to paying you back. Each of these options needs to be considered carefully before you commit, so you can decide which will be the best for you and your child.
Joint ownership
If you're worried your children won't be able to afford a home loan on their own, or you want to take a more active role, you could consider making a joint purchase of a property by using the equity in your home.
Joint ownership can be arranged as a 50/50 split (joint tenancy arrangement) or a customised tenants-in-common arrangement depending on how much you each want to pay.
The downside of joint ownership is that if one party fails to make their repayments, the other has to make up the difference to make sure the full monthly payment is covered. Shared responsibility could also be a recipe for arguments down the line.
Guarantor loan
If you want to provide financial security for your child, you could act as a guarantor. This doesn't simply mean agreeing to cover their mortgage payments if they get into financial difficulty, but also taking out another loan on your property that helps to secure theirs.
Advantages of a guarantor loan for young buyers are that they might not need to pay a deposit and could save hundreds or even thousands of dollars on interest in the long term.
The risk for guarantor parents is that you might find yourself having to cover their repayments, with the possibility of losing your own home if you're not able to.
Financing their deposit
If you prefer to avoid the risk of being responsible for your child's loan, and want to encourage independence, paying their deposit is still a generous alternative. Saving up for a 20% deposit is the biggest barrier many young people face to buying a home, so taking care of this in one fell swoop will give them a great headstart.
It's up to you to decide whether this is a loan – in which case you might want to draw up a binding loan agreement – or a gift.
Buying a property in your child's name
If you have the means to pay for their property yourself, and you wish to do so, there are several ways you can go about this. You can buy the property in your name and transfer ownership at a later date when they purchase it from you, you can buy it in your child's name, or you can buy it in their name through a trust.
While this will ease the burden on your child, they could be hit with a significant Capital Gains Tax payment in the future when they take ownership.
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If you're struggling with debt or you need advice about any important financial decision, call Debt Fix on 1300 332 834 to speak to one of our advisors today and get a free debt analysis with no obligation. The information in this article is general information only and should not be taken as constituting professional advice from Debt Fix Pty Ltd.
