How to help your child buy a home

Over the years we have seen a rise in new buyers seeking alternative pathways to buy a home. The percentage of those aged 25-29 remaining at home has increased to more than 17 per cent due to rising property prices and time spent in higher education, according to the Australian Institute of Family Studies.

But their parents are often sitting on massive capital increases in property assets, and may be considering ways to help their children buy their first home. Here we look at some of the ways that parents may be able to help their children buy a home.

Guarantor loans

Guarantor loans are a fantastic way for parents to support their children without requiring a cash deposit contribution.

It can often seem like the most logical solution for parents with available equity to help their children to purchase their first home. This decision would be dependent on having the confidence that their kids have the ability to pay the loan and are ready for the responsibility of home ownership and all that it entails.
With an element of risk involved, it is important that anyone thinking of going guarantor for a loan has a frank and honest discussion with the applicant to understand their ability to meet the loan requirements under a variety of circumstances before committing.

Savvy FHBs looking to get into the property market are also considering the concept of “rentvesting” – purchasing property for the sole purpose of renting it out.

This allows young purchasers the ability to purchase their first home whilst maintaining their current lifestyle. Given the current state of the Perth rental market, it could prove to be a smart decision for those who are wanting to get into the market while still having the security of living at home.

With demand for rentals remaining high with no sign of slowing down, it is no surprise that there has been an increase in FHBs choosing to buy homes in areas they can afford and renting them out while they either stay at home with parents or rent elsewhere in areas that suit their lifestyle.

You can learn more about going guarantor for a loan here, or get in touch with an experienced Perth mortgage broker today to discuss in further detail.

Apart from going guarantor for a loan, there are some other ways for you to help your kids buy their first home.

Lend or give the money

A gift of cash can be provided with no obligation of repayment. In addition, potential creditors can only make a claim against the child and not the parents if there are legal problems. There are also no tax implications and the child can immediately access the funds.

The advantage for parents in acting as guarantor is that they do not have to use their own cash.
However, there are some caveats involved with this option:

Something else to consider in this instance is that it also reduces the funds you will have available to fund your own retirement, which may or may not be an issue for some parents.

Alternatively, you could consider providing cash to your children as a loan. Even if you have no intention for the child to repay the funds, a loan agreement will give you the option.

Funds subject to a loan agreement would be considered a liability in family law proceedings and be repayable to the parent in full, meaning you have a safeguard in place should it be required for whatever reason in the future.

Buy a property together

Another option for parents wanting to help their children into the property marketwould be to buy a property with their child as “tenants-in-common”. This resuls in individual shares of ownership, which effectively means the parent is purchasing an investment property.

It can be done with the undertsanding that the child will buy out the parent in the future, or to sell the property later and share the proceeds, in which case the child may then have the funds available to purchase another property on their own.

It is important to understand that in this instance both parties are liable for the full amount of the loan. Potential risks with becoming tenants in common may be that the either party is unable to maintain repayments. There may also be implications for the parents with regards to capital gains tax in the year of sale.
The child will

be able to use the main residence exemption for capital gains tax for their share of the property if it is their principal place of residence (they are living in the property full time).

If you’d like to book an appointment to discuss any of these options in order to determine which might work best for your family, our experienced mortgage broker would love to help. Please click here to select a time and method that is convenient for you.

All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.