It's a discussion we have everyday in our review meetings with our clients, how do we help our children buy a home?
As families gather to celebrate Christmas it’s possible that the dinnertime conversation may turn to the latest leaps in property market prices.
For kids trying to save a deposit for their first home escalating prices can make a purchase seem like the impossible dream. And parents can find it frustrating to stand by and watch them struggling to take that first step.
While many parents may want to give their offspring a helping hand it’s something that should be considered carefully.
Here are six points to ponder before you declare the bank of mum and dad open for business.
Can you afford it?
Before making any generous gestures it’s good to be clear about your own financial situation. How might assisting your children affect your retirement plans, superannuation savings, or the equity in your home?
It is worth considering the impact it may have on your pension or tax status too.
Perhaps you have the means to help one child. But will that decision create an expectation that you will help other children in the same way?
Are you agreeing to help your children out of guilt, obligation, or fear? When the emphasis is on the child’s situation it can be easy to overlook your own financial and emotional wellbeing.
What is the best way to assist your children?
There are various ways you could assist your children. Some parents choose to cover the additional costs of purchasing a home such as stamp duty or conveyancing and moving costs.
Or they may agree to top up their child’s savings so that they can avoid the expense of lender’s mortgage insurance.
Agreeing to go guarantor for your child is another way that parents smooth the way for a first homebuyer.
It’s good to weigh up the implications of each method before making any decisions.
Is it a loan or a gift?
It can become tricky terrain if there is not clear communication upfront about whether the financial assistance is a loan or a gift.
Make sure any terms are clear. These should be documented in a written agreement indicating the loan term and any interest requirements including the interest rate.
Are they a good risk?
Parents can become the lender of last resort if their kids have had no luck getting a mortgage from a financial institution. Perhaps they have insufficient income to support a loan of the size they are seeking or they are lacking the ‘genuine savings’ built through the discipline of regular saving. In that situation the risks can be greater for parents seeking to fill the financial gap.
What happens if things change?
It’s not just about the financial impact. Things can get messy if your children are unable to repay the loan or they repay it more slowly than you anticipated. Or a loan arrangement can become unglued if they are buying with a spouse or partner and the relationship breaks down in the future. And what could be the potential financial and emotional toll if the arrangement doesn’t go according to plan?
Helping your children buy a home is a significant financial decision so contact us if this is something you are considering.