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Parents buying property with kids

Wednesday, April 27th, 2016

We’re seeing a new trend in the Sydney property market, with more cases of parents buying property with or for their children over the past 12 months.

We last saw this trend during the GFC 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 on an upwards trajectory and this has prompted 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 today, 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 many aspiring first home buyers back. 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 our agents are encountering today are as follows:

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
Parents buying the property outright as their own investment, then renting to their child

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

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

Going guarantor

There are a variety of guarantee types when it comes to buying property, but effectively what it all means is 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. 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.

‘Gift’ some money

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 the property together

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. This is a typical option for parents living on the outskirts of cities or in regional locations. Their child needs to be city-based for university or work, so they buy an apartment as an investment and their child covers the repayments by paying rent. 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 broker and/or your financial planner before taking the path of joint ownership or guaranteeing a loan for your children. It’s fantastic to see so many parents assisting their children into real estate but it’s really important to protect yourself and your own assets too.

SWITZER BROKER

Author: Lynne Cox

She is a Mortgage Broker and holds an Australian Credit Licence # 365386. She has been involved in the Mortgage Broking Industry since May 1996 but has been involved in small business since 1977. Lynne is a licensed finance broker. She was the President of the Finance Brokers Association of Australia until March 2004 where she is now a Life Member, and she was also a Member of the Finance Brokers Supervisory Board until it disbanded in October 2003.