Property

How to help your kids buy a house

Auction gavel on a table

Nina Hendy

Posted June 08, 2021

Parents are stepping in to bridge the housing affordability crisis in growing numbers. Here’s how to make it work.

As house prices soar into unchartered territory, record numbers of parents are choosing to help their adult children with that first step onto the property ladder. 

The decision to help financially comes as the pandemic-fuelled property boom pushes home ownership further and further out of reach of young buyers – many whom suffered job losses at the height of Covid-19 restrictions last year. 

Parents are stumping up around $90,000 per adult child on average – an increase of more than 20 per cent in the past 12 months, according to analysis by researcher Digital Finance Analytics. It’s enough for a deposit in many postcodes beyond Melbourne and Sydney. 

The Bank of Mum and Dad is estimated to have loans of about $35 billion, making it the nation’s ninth-largest mortgage lender. How parents are handling these loans with their adult children vary greatly. 

Australian personal finance authority Noel Whittaker helped his three children get onto the property ladder. “We’ve always believed that it’s better to help your children earlier, rather than later. But saying that, you’re better off giving your adult children a hand up, rather than a hand-out,” he says. 

One way to do this is to incentivise them to save. For example, you could offer to gift your child $10 for every $10 they save towards a deposit for a house. “If they’re hopeless with money, this could teach them an important lesson,” he says. 

But it’s important to also safeguard your own financial wellbeing in the process, Mr Whittaker warns. 

There’s no easy answer on how to help your child get into property, he says. “Where it becomes tricky is if there are martial break-ups, which are not uncommon these days.” 

Also, you can’t always treat each child equally. Factors that come into play include whether or not they run a business, if they’ve demonstrated good savings habits in the past, what they do for work, if they have a family and your own relationship with them, he says. 

Here’s how to help adult kids get onto the property ladder. 

Auction brochure

Performing due diligence will help provide parent guarantors increased confidence that their investment is safe. Photo: Getty

 

9 ways to help adult kids get onto the property ladder
 

Going guarantor

If you guarantee a loan for your adult child, you’re responsible for paying back the entire loan if the borrower can’t.

Think carefully about your own finances, make sure you understand the contract and don’t be pressured into this, Whittaker says. And if your child runs their own business, the risks grow, because plenty of businesses fail, he adds. 

If you do decide to become a guarantor, you have every right to insist on transparency when it comes to your child’s weekly budget. “The key here is transparency. Go to the lawyer together, and make sure everyone is on the same page,” he says.

Gifting the deposit

If you’re in the financial position to gift your child a deposit for a property, the written agreement must demonstrate that all parties knew what they were doing. 

Remember that a gift means no strings attached. Of course, if your child’s married and the relationship breaks down, half of the deposit money may walk out the door at that time, Whittaker says. 

Also, bear in mind that a financial gift may impact the aged pension, so understand the ramifications of gifting money.

Loaning money

If you decide to loan your child money for a deposit, the usual approach here is that it is payable on demand. So if your circumstances change, you can get the money back.

The key here is careful documentation that includes specific repayment milestones and detail about whether the loan will accrue interest. 

Your loan will form part of your child’s matrimonial assets if they are married. This assets could then be divided up by the court if your child’s relationship breaks down, which may not be in their best interests. 

A loan should form part of your Estate planning, and you should also lodge a caveat over the property, Whittaker adds.

letter box with number one on front

If you're thinking of helping your kids buy a house, it's important to also safeguard your own financial wellbeing in the process.

 

Rent-free living 

While not an option for everyone, giving adult children rent-free accommodation to help them save can be a great way for parents to step in. This could help your children save around $500 a week in rent and outgoings, or even more, Whittaker points out.

This savings boost can help your children save for a deposit, and you could negotiate some assistance around the house in return. 

Joint ownership 

Buying a house with your child and owning half of it sounds logical, but Whittaker warns that adding your name to the title of the property means it will be considered an investment, and therefore be subject to tax obligations.

Joint ownership means putting your name on the title deed, which brings with it capital gains tax exposure and impact on the pension, he explains. This might work for self-managed retirees, but make sure to get financial and legal advice, whichever route you take. 

Do your due diligence 

As well as protecting yourself financially, there are other considerations, too. If you're planning on going guarantor, it pays to do your research and understand what’s involved before making the leap to ensure you know what you’re getting yourself into. 

For example, there’s the pre-purchase building inspection, conducted by a qualified inspector. 

This inspection will cover everything from faulty roofs to rising damp and cracks in the wall, and will include information on whether these faults can be repaired, and what caused them. It should also include a cost estimate for each of the repairs. 

Rapid Building Inspections project manager Heidi Richardson says: “Undertaking a pre-purchase building and pest inspection on a potential property can uncover and document hidden (and sometimes obvious) flaws or pest concerns, which provides parent guarantors with increased confidence that their investment is safe.” 

Auction sign

Photo: Getty

 

Make sure they have pre-approval

The pre-approval process to ensure your adult child is able to secure the loan is an important first step. This process can take some time and effort, and may even require a year or so of solid savings to demonstrate to the bank that they can service a mortgage.

Pre-approvals are intended to be a guide that the application fits the lender’s criteria. The purchaser will still need to obtain a full, unconditional approval before committing to a property purchase.

Help them organise finances and other legal documents 

After exchanging the contracts and paying the deposit, the solicitor or conveyancer will continue to work in the background to prepare for settlement.

This process includes signing the transfer document, to be given to the lender at settlement, and registered with the Titles Office in your state to ensure the change of ownership is recorded. Applying for financial approval from the lender to ensure all finances are in order for settlement is also crucial at this time. 

Make sure they have allowed for additional costs

Stamp duty is a state government tax on property sales, which will apply to a purchase. Stamp duty is payable within a specific time period after the settlement date, which can very between states.

Your solicitor or conveyancer will usually arrange for this to be paid on your behalf during the settlement period.

Other costs will include insurance, just in case the worst should happen, moving costs, the loan application fees, council rates and mortgage registration or establishment fees, which also apply.
 

Note: The advice provided in this story is general in nature and individuals should seek independent professional advice before making decisions about financial affairs.