House prices have risen hugely in Australia in recent years, especially on the Eastern seaboard. This has led to a lot of parents helping their children to afford their first homes. But this isn’t always as sensible and straightforward as it seems – there are a number of things parents should be thinking about before taking on such a big commitment.
How safe is it to be a guarantor?
Many parents now act as guarantors to enable their children to buy their first properties. This often reduces the cost of the child’s mortgage, as it is secured on their parents’ home as well as their own. This is why it’s a big risk to take. In the event of your child being made redundant or falling ill, they may find themselves unable to keep up with the repayments. The responsibility then falls on the guarantor – in extreme cases, the parents can lose their own home.
Acting as a guarantor on your child’s mortgage can also affect your own ability to borrow. If you need to take out a loan for something else, the additional risk of your child’s property may cause lenders to decide you won’t be able to repay another loan and turn down your application.
Is it a good idea to pay your child’s deposit?
Paying a deposit on your child’s property helps them with the initial outlay and then leaves them with sole responsibility for paying the mortgage. This is often seen as a more responsible option, particularly as it’s all legally documented – you have to sign a statutory declaration stating that your child is not expected to repay you for the cost of the deposit. Banks look upon it as a gift, and it can also be a good way of preparing your child for the financial responsibility of a mortgage, as they are likely to have to keep the money in their bank account for a period of time – usually three to six months, depending on their mortgage lender and policy. This is to demonstrate to the lender that they are capable of being sensible with their money, so they’re likely to be able to pay back a home loan.
However, it’s not without risk. For a start, if your child ends up getting divorced, the money you have invested in them could ultimately go to their ex-spouse. The other main problem is that many parents are over-generous in the properties they pay deposits on. This can cause future financial hardship for their children, who end up living in properties they can’t afford to run.
What about going into partnership with your child?
Some parents now choose to buy a property in partnership with their children, but like all partnerships, this can have its own problems. Your child may meet a partner who ends up moving into the property with them, at which point they’re likely to want to make changes and have more financial control over their home.
There’s also the risk of either the parents or child being tempted to draw equity from the property to pay for something they want, which can cause feuds within families and leave everybody’s financial security at risk.
Where’s the money coming from?
If you plan to help your child financially, you have to think carefully about where you’re going to get the money from. A lot of parents now are drawing money from their superannuation accounts to help their children buy property. If you go down this route, you need to take into account the fact that you’re likely to live longer than previous generations, and you may need the extra money to pay for your own care in old age.
Some parents are getting round this by having a “granny flat” arrangement, where they sign their property over to their child in return for the child agreeing to care for their parents when they’re old. However, this can cause problems where there is more than one child in the family – you want to be able to treat all your children equally, but you can only sign the property over to one of them.
Get the right advice
Ultimately, if you do intend to help your adult children get onto the property ladder, the right solution is something for you and your children to work out between you. As with all financial arrangements, it’s highly advisable to seek independent financial advice and make sure everything is documented legally, so there can be no disputes in the future.
It’s also worth remembering that not all support has to be financial – your child can benefit just as much from your help with saving tips and drawing up a financial plan to make sure they stay on top of their home loan repayments. This can also bring you closer to them, as sometimes it’s worth more than money just to know you have someone on your side to help you make those big decisions.