Buying a first home has always been a financial challenge, but housing affordability in Australia has declined so much in recent decades that younger generations are struggling to gain entry to the property market at all.
As a result, more parents wish to take practical steps to help their children step onto the property ladder.
This article explores three common ways that parents can assist their kids buy a home: through a gift of cash, a loan, or by acting as a guarantor.
In addition, we will look at two less common approaches: co-ownership purchases and using trusts to assist children to make their first home purchase.
We’ll delve into the pros and cons of each approach, highlighting key considerations and the main risks of each option. The information is general only and we strongly recommend that you seek professional advice before taking any course of action.
Parental Assistance Comparison Table
| Method | Best For… | Primary Risk |
|---|---|---|
| Cash Gift | Maximum freedom; no repayments | Irrevocable loss of parents’ funds |
| Family Loan | Structured help; protecting principal | Potential family conflict over debt |
| Guarantor | Parents with equity but limited cash | High risk to parents’ own assets |
| Co-ownership | Sharing long-term investment growth | Loss of First Home Buyer benefits |
| Family Trust | High-asset families; control/protection | High setup and ongoing admin costs |
Gifts: Providing a Financial Head Start
Many parents choose to simply provide their children with a monetary gift to assist with their first property purchase. This gift can be used for a deposit or to reduce the mortgage amount. This is a generous gesture that provides children with the maximum freedom to immediately use the funds to assist them with a property purchase.
In addition, receiving this gift should have no tax implications for the recipient in Australia. However, such a gift will have an irrevocable impact on the parents’ finances, without the promise of future repayment. Parents should only make such a gift if it will have no impact on their financial security in the future.
Family Loans: A Structured Approach
Alternatively, parents can opt to provide a loan to their children to be repaid over time, with or without interest. These loans may be recorded in a formal written loan document, although it is not uncommon for these loans to be verbally agreed between the family members.
Loaning money provides a structured approach to assist children with the purchase of a home. With a carefully drafted loan agreement, including a structured repayment schedule, this can be a way for parents to help with less risk to their own financial security.
However, loans between families can be a source of relationship conflict, especially if the loan is not repaid in a timely fashion. Moreover, family loans are often not well documented, and this can result in the parties having a very different understanding of their obligations. Seeking legal advice from an experienced conveyancing professional is a wise step to ensure all parties fully understand the terms.
Going Guarantor: Using Assets as Collateral
Going guarantor usually means that parents use their own property or assets as collateral to secure a home loan for their children. This approach can help their kids avoid paying Lender’s Mortgage Insurance (LMI) and may allow a purchase to go ahead with a substantially smaller deposit.
Most significantly, by reducing the need for a large deposit, going guarantor can assist children to enter the property market many years earlier. However, it is very important that parents realise that this is not a low-risk option. Too often, parents will go guarantor without fully understanding that they can lose their own assets (including their home) if their children fail to meet their mortgage repayments.
Property Co-ownership
A less common option is for parents to purchase a property with their children, sharing both the financial and legal responsibility. This provides a sense of security for the younger buyer and allows for sharing property expenses. It also has the benefit that both parties will gain from any increased equity.
First, it is vital that the correct ownership structure is chosen (such as Joint Tenants or Tenants in Common). You should also consider how this might affect First Home Buyer grants or exemptions available in NSW, as joint enterprises can sometimes disqualify certain benefits.
Family Trusts: Complex Asset Management
Often families with significant or complex assets will use a family trust to assist their children, or even grandchildren, to purchase property. A trust can offer various options for transferring property or assets to children while allowing parents to maintain control and direction over the assets.
This approach can have tax benefits, although this is an area where it is necessary to obtain expert advice tailored to the circumstances. The need for ongoing legal and financial advice can make this a complex and expensive option, usually advisable only for families with significant assets.
Conclusion: Protecting Family Relationships
Money can strain even the most amicable relationships. Consider the potential impact on family dynamics when providing financial assistance and discuss expectations openly. Whether gifting, loaning, going guarantor, or establishing trusts, each method has its own set of advantages and drawbacks.
Documenting financial transactions to mitigate risks is essential. If you or someone you know wants more information or needs help or advice, please call our St Marys office on 02 9623 2777 or email co****@***********om.au.
The information is general only and we strongly recommend that you seek professional advice before taking any course of action.
Frequently Asked Questions
Can I gift a deposit to my child in NSW?
Yes, you can gift a cash deposit. Lenders usually require a “gift letter” or statutory declaration confirming the money is non-repayable. While there are no immediate tax implications for the child, parents should consider the impact on their own retirement and future financial security.
What is the risk of being a guarantor for a child’s home loan?
As a guarantor, you use your property equity as security. If the borrower defaults, you are personally liable for the guaranteed amount. In the worst-case scenario, this could result in the loss of your home. It is vital to seek independent legal advice before signing.
Does buying property with my child affect their First Home Buyer benefits?
Yes, it can. If you already own property and buy a home jointly with your child, they may lose their eligibility for certain NSW First Home Buyer grants or stamp duty concessions. Always check current Revenue NSW criteria before choosing a co-ownership structure.