Helping your Adult Children Purchase Property - Tips Tricks and Pitfalls

Given the median house price in most capital cities of Australia, many families make the obvious decision to work together to get their kids into the market. If you have this kind of assistance you are so fortunate. 

There are multiple ways parents (or other family members) can help: 

Lending or gifting the money to your children directly

Many clients ‘lend’ funds to their children directly, especially if the child they are lending to has a partner (or later meets one), thinking that saying it this way (as opposed to saying its a ‘gift”) will protect assets. If the relationship breaks down and property sold, the parents are thinking the money ‘lent’ on day one gets repaid to the parents first.

However, don’t think that just because you use the word ‘loan’, this will be considered as such in family law. In the event of a relationship breakdown, the courts wont necessarily look at this amount as a loan. It has to walk like a duck and quack like a duck to be considered a duck.

If you are really lending your child the money, and legally want this to be considered as such in the event of a relationship breakdown (as opposed to a gift which would be in included in the overall asset pool), you would need to set up a proper loan agreement that you are prepared to enforce, and basically act as a bank. You may need to put a caveat on the property or a registered mortgage and enforce non payment of repayments (making Christmas lunch a bit awkward).

The other option to consider is to have your adult child consider entering into a Binding Financial Agreement with their spouse, to effectively quarantine this amount or any future “gifts’. Note however as the parents you are not directly a party to this agreement. Young people in a first relationship would find this very unromantic. 

These arrangements all come with some family dynamics that can potentially be, or become tricky.

Acting as a Security guarantor.

Lets say your child and their partner were looking at purchasing a home of $1.5m. They have $100,000 deposit (which will primarily go towards transaction costs plus a bit leftover). In order that they don’t pay lenders mortgage insurance and have access to a cheaper interest rate, you become a security guarantor for 20% of the value of the property, around $300,000, this being lodged against your own property. You have no physical payments to make and no income assessment needs to be done for your personal situation. Effectively your child now has a loan of $1.2m and a loan of $300,000, total $1.5m. Both of which they are fully responsible for (principle and interest). 

In a few years, the value of the property goes to $1.85m. Now there is 20% equity in the property you can be removed as the security guarantor.  Your job is done.

If there is a relationship breakdown in the meantime, you have not physically gifted any funds, the property can be dealt with as needed and you haven’t ‘gifted’ any funds to a rapidly departed ex now partying on the Gold Coast with their new BBL paid for by your child (effectively you).  Could there be a loss on the sale of the property? Yes, but unlikely to be as high as $300,000 and the partner may be also responsible for this shortfall equally if they were on the title and mortgage.

Some frequently asked questions:

• If I am a security guarantor for my child and their partner, am I liable for the whole debt?

The short answer is no, your debt is limited to the part of the loan you are guaranteeing. Different banks have different nuances, however in essence its rarely more than 20% plus recovery costs.

• Will the bank force me to sell my home?

In theory, they are entitled to. In practice, banks have a social license to protect. You may scoff but this is true to a degree. They will negotiate, wait, find other solutions such as debt mediations and refinancing. 

In order to mitigate these unlikely but still remotely possible issues, we personally want to know, when setting these loans up and assessing whether they are the right fit for you, if you as the guarantor has back up finances – superannuation lump sums, other assets and/or incomes from other sources.

To sum up, there are multiple ways you can help your adult children get into the property market. Make sure before choosing between gifting or loaning and acting as a security guarantor that you get good legal advice (as this article is written by me just a mere mortgage broker and I am most definitely not a lawyer) and be aware of the potential pitfalls lest young love fall by the wayside in the pursuit of the Australian property dream.

Want to know more? Hit reply or give me a call on 0403 397 060

Reggie