There are two kinds of parental buyers – those who purchase or financially assist their children to buy their first home and those parents who do all the research for their children who are buying.
We’re seeing the rise of mums and dads buying property for their children in Australia’s capital cities as it becomes increasingly difficult to enter the property market and afford your first home.
Parental buyers are typically Baby Boomers or Gen X’s who place a high value on owning their own home and building financial security through property, as they have done themselves. They worry their children will never be bale to buy on their own.
In January, Westpac released its Financial Future Report which surveyed 1,593 Australians with children or grandchildren under the age of 12, as well as 50 prospective parents.
About 40% of respondents believed their children or grandchildren would not be able to afford to save the deposit for their first home.
If you’re in a position to financially help your children buy their first home, here are the most common options:
It’s possible to be the guarantor on your child’s loan rather than buying the property yourself, but this usually involves putting your own home up as security. Unfortunately, many parents don’t realise if your child defaults, the bank can ask you to pay the loan out in full. If you can’t pay it, your assets (usually the family home) may be sold to meet this obligation. If you’re thinking about going down this road, perhaps consider a limited guarantee to reduce the risk as you’re only guaranteeing part of the loan. Some lenders will allow a loan to be split into two – with one larger interest-only loan not involving you and one smaller principal and interest loan that is guaranteed by you. The smaller loan gets paid off first so your risk is limited to a specific timeframe.
Lend some money
Lending money to your child frees you from the obligations of a loan guarantee. It’s a good option if your child has the income to manage repayments, but needs help with the deposit. Bear in mind that if your child is using borrowed funds as part of their deposit, some lenders will see this money as encumbered and therefore not a legitimate deposit or evidence of savings.
It’s becoming increasingly popular for parents to buy a property as a gift for their adult child to live in immediately or gift some of the money. You can avoid the risks associated with going guarantor if you decide to gift some of the money, but of course you don’t have any say in how the money is used.
Buy the property together
Parents on more limited budgets are joining forces with their adult children and pooling funds to purchase a shared investment, with the child usually becoming the tenant. This option allows you to use the equity in your home as security, with the cost of the loan shared between you and your children. But if they stop making payments, the onus is on you to cover their share. There are two ways to own a property jointly with others. You can be joint tenants, which means you own the property in equal shares and if one joint tenant dies, the surviving joint tenant automatically gets their share, irrespective of the terms of any Will. Tenants in common can own the property in any proportions they like. If one dies, their share is passed on according to their Will.
Buy the property yourself and lease it to your child
A great option for enhancing your asset portfolio while also giving your child somewhere to stay. In this situation, most parents either buy for investment with the intention of letting their child live there for a period of time, usually during their university years; before resuming leasing to other tenants, or buy initially for investment while their child is still very young, with a view to gifting the property to their child when they’re old enough to leave home. The downside to buying the property yourself is you’re not helping your child buy their own property, unless you’re subsidising the rent so they can save for their own home.
On the other side of the coin, you have parents who may or may not be financially assisting with the purchase of a home for their children, but are doing all the research and admin side of buying property.
We see a lot of these ‘helicopter parents’ in the industry – parents house hunting for their adult children who are in their 20s and 30s.
At Aitken Real Estate, we refuse to take researching parents through properties without the children who are doing the buying. We believe the kids should experience the entire buying process – from the research right through to the signing of contracts. If they’re ever going to buy another house in the future, they need to understand how hard it can be, feel the disappointment of missing out on a property and dealing with agents.
Obviously, everyone’s circumstances are different, so we recommend talking to a broker and/or your financial planner before taking the path of joint ownership or guaranteeing a loan for your children. And if you’re helping your children research for their first home, be mindful that it’s important for them to understand the real estate process so they are prepared to do again in the future.