A new trend is emerging in Australia and all over the world where parents are helping their generation Y children purchase their first homes.
Many parents are helping their children, first home buyers who may not have the credit or savings to afford this major cost, by lending or gifting them part of the required deposit. Some are stepping in as guarantor for the loan, while others are getting more hands-on and co-buying property or investing their self-managed super funds (SMSFs) into property with their children.
There are pros and cons to these different forms of financial aid.
This is a way parents can help out without signing anything away to a bank. While it can be arranged informally, it might be best to sign a formal agreement so all parties are aware of their obligations for the immediate and distant future.
One drawback to this approach is that banks may consider loaned money encumbered and not accept it as part of the deposit.
Guaranteeing the loan
Becoming a guarantor is a way to help out, but if the child defaults, the parent must pay the loan.
In the case of a default, banks will require the loan be paid out in full rather than in fortnightly or monthly installments. So, there is a risk that parents would have to sell their assets to pay their son or daughter’s loan.
One way to prevent this outcome is to secure a limited guarantee, so parents are only responsible for part of the loan.
Another option is for parents to use the equity in their own home as security for this investment property, and then share the mortgage costs with their child.
However, the parent still runs the risk that the child will stop making payments, which would make them responsible for the entire loan.
Some parents decide to gift their children money for a deposit, which means they will not face any penalties from the lender.
However, this can be risky if something goes wrong with the property because the parents will not have a say in how the money is spent.
Some families are using their self-managed super funds (SMSFs) together to purchase property, particularly as more adult children are staying at home longer than in previous generations.
Once an SMSF is set up, it can be difficult and costly to get out of, so if you opt to go down this route it is best to legally outline what would happen if something were to go wrong, such as a family breakdown, ill health, death or waning interest.
If one member finds they cannot spend the time managing the SMSF or wish to move to another fund, it can affect everyone else with a stake in the property. Ensure you have planned for the future to make your investment more secure.