Parents are being asked to assist their children into their first home or to upsize as they start a family.


It’s important, however, that both parties enter any arrangement with eyes wide open. We last saw this trend during the global financial crisis when tighter lending criteria led to more buyers banding together with friends or family to buy property.


Today, I think there are probably two factors driving the re-emergence of this trend. The market is moving upwards, prompting many people to re-engage with property. Families are getting together and discussing how they could take advantage of the improving market by pooling their funds to invest, with the added benefit of putting a roof over the heads of one or two family members, usually the kids.


The ceasing of first-home buyer grants on established properties has set back many aspiring first-home buyers. It looks like this might have prompted more parents to chip in funds to help their children buy their first homes. The most common scenarios that I am encountering are parents going guarantor on their child’s loan; parents buying jointly with their child as a shared investment (usually with the child taking up residence); and parents buying the property outright as an investment and renting to their child.


Parents looking to help their children into the property market can contribute money in a variety of ways, all of which carry their own risks and benefits.


If you’re in this position, here are some options worth considering:


Go guarantor


Going guarantor means that you will assume responsibility for the loan if your child defaults. Unfortunately, many people don’t realise that if your child defaults, the bank can ask you to pay the loan out in full. If you can’t pay it, your assets may be sold to meet this obligation.


To limit your own risk, you might consider a limited guarantee where you are 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.


Lend 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. 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.


Give money as a gift


If you gift money to your children, you avoid the risks associated with going guarantor but you don’t have any say in how the money is used.


Buy property together


You can use the equity in your home as security, with the cost of the loan shared between you and your children. 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 and lease it to your child


This is a great option for enhancing your asset portfolio while also giving your child somewhere to live. This is a typical option for parents living on the outskirts of cities or in regional locations when their child needs to live in the city. The downside here 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.


Everyone’s circumstances are different, so I recommend talking to a mortgage lender and/or your financial planner before taking the path of joint ownership or guaranteeing a loan for your children.


Tony Slack is a buyers’ and vendors’ agent with Geelong Real Estate Advocates.