Want to help your children buy property? Here are some options.

Louisa Sanghera | December 01, 2018

The real estate market can be tough for young adults, but as a parent you may be able to help...

1. Parent-to-child loan

A parent-to-child loan is when a parent lends their child money. This is a formal, legally binding arrangement, administered by an independent third party. At the start of the loan period, both parties agree to terms including the repayment amount, the schedule and the process to manage defaults. 

Benefits: You can set generous terms for your child, but your assets, savings and credit rating are somewhat protected as you are not the borrower. 

Drawbacks: There are legal implications for your child if they have a spouse and the relationship breaks down. The spouse could try to claim some of the loan proceeds as an asset of their relationship to which they are entitled. There are also tax considerations for both parties. 

2. Family guarantee

If your child does not have enough security for a mortgage, you could provide a family guarantee. This is where you use some of the equity in your own home as part of the security. For example, your equity may cover 20% of the security and your child's new property is the other 80% - this is known as a guarantor loan. This could be a temporary arrangement until your child has paid down the loan to an acceptable level. 

Benefits: You have the option to guaranteeing a portion of the total loan. 

Drawbacks: If your child defaults, your assets are at risk. 

3. Becoming a co-applicant

You can help your child to secure a loan if signing as a co-applicant. This means you are equally as responsible as your child for meeting the repayments. The lender will consider your assets in its borrower's assessment. 

Benefits: Your child can obtain a loan with a low income.

Drawbacks: If your child stops making repayments, you are responsible for making them. If you can't make the repayments then it will affect your credit rating. 

4. Gift

When you give your child money but you don't expect it to be repaid, then it is considered a gift. You may need to sign a statement to say it is a gift and not a loan. 

Benefits: You can provide financial help, possibly without the legal, tax or financial implications of a formal arrangement.

Drawbacks: If your child has a spouse and their relationship breaks down, then the former partner could make a claim for the property.

5. Assistance in kind

If you are risk averse, you can consider helping in kind, which means covering some of the expenses that come along with buying property. You could pay for services such as a property survey, conveyancing fees or help with the stamp duty.

Benefits: You can give practical financial assistance.

Drawbacks: The amount of money you provide may be more than what your child spends. If you contribute more than what the costs are, the rest of the amount is subject to the terms of a gift or a loan.

Make sure you are well informed about your options when giving or lending money so that you can remain in the best position to help your child become a home owner. Contact your mortgage broker to discuss the right financial arrangement for your family.