For many young Australians, it is arguably tougher than ever to buy their first home. Faced with rising property prices, larger deposit requirements from lenders, and the ever-increasing cost of living, it seems the Great Australian dream of home ownership is becoming increasingly out of reach.
Because of this, more parents and grandparents are doing what they can to provide them with financial support. However, while it’s a lovely gesture, it’s important to understand how you can best extend it and, perhaps more importantly, what potential risks are involved. Not least because while a helping hand can make a real difference, it should never come at the expense of your own financial security.
With that in mind, let’s take a look at what parents need to know about helping their kids (or grandkids) buy their first home.
Why Are So Many First-Home Buyers Struggling to Get Into the Property Market?
A recent study by LJ Hooker found that around 80% of Australians aspire to own a home. Primarily because they see it as being integral to their financial freedom and long-term security. However, at the time of writing, about 50% of them have abandoned or delayed their property dreams due to concerns about surging property prices and fluctuating interest rates.
When you dive further into it, you should be surprised. The average house sale price in Australia is currently over $1.1 million, while the average home loan is $735,000. When you consider that most lenders require 20% of the total value of the property you want to buy, and that rent, groceries, fuel and utility bills are increasingly consuming a large portion of a person’s income, then it’s no wonder why so many young people are struggling.
For many, it’s hard enough trying to make ends meet, without having to save up for a deposit as well.
What Are the Different Ways Parents and Grandparents Can Help?
There are a few ways parents and grandparents can support a first-home buyer. However, it is important to recognise that each approach has different financial and legal implications that you should be aware of.
For this reason, before moving ahead, it’s worth discussing your expectations openly. It is also worth putting any agreements in writing to prevent confusion and disagreements later.
Additionally, to find the best option, many families seek guidance from specialist mortgage brokers, such as Andrew Hadjidemetri, to better understand which first-home buyer assistance options may best suit their circumstances.
1. Gift Money or Lend It to Your Child
One of the most popular ways parents can help their child buy their first property is by providing financial assistance, which can take the form of a gift or a loan.
A gift is usually the simplest arrangement because the money can be used towards a home deposit, stamp duty or other purchasing costs without any expectation of repayment.
That said, a family loan may be more appropriate if parents wish to maintain fairness among siblings or expect the money to be repaid later. Whichever option you choose, it’s important to consider how the arrangement may affect your own finances in the years ahead, and your relationships with all your children.
2. Family Guarantee Home Loan
If you are reluctant or unable to gift or lend money, but still want to help, then a family guarantee home loan could be a good bet. It allows you to use part of the equity in your own property as security for a child’s mortgage.
Doing this can reduce the deposit they require, which may help first-home buyers avoid paying for lenders’ mortgage insurance. In fact, for many young Australians, a guarantor home loan can significantly shorten the time required to save for a property.
However, it’s important to understand that the guarantee creates a legal obligation for you that you should not enter into lightly.
3. Become a Guarantor
Another option you might consider is to become a guarantor. Essentially, this means you assume responsibility for making repayments if the borrower is unable to do so themselves.
While nobody enters into these arrangements expecting problems, you should be realistic to understand that life can change unexpectedly. Unemployment, illness, or relationship breakdowns can all affect a person’s ability to repay a loan, so with you being a guarantor, you could find your assets at risk.
This is why many families seek legal and financial advice before signing any guarantor documents.
Why Should Financial Arrangements Be Put in Writing?
Unfortunately, money does funny things to people’s minds, and even close families can experience misunderstandings or relationship breakdowns because of it.
If you decide to lend funds rather than gift them, it is advisable to draw up a written legal agreement outlining expectations and responsibilities regarding repayments. This is particularly relevant when multiple family members contribute to a property purchase, as ownership arrangements should also be documented.
It is important to get across to your child or grandchild that written agreements are not a sign of distrust. Instead, they are simply a way to ensure everyone understands the arrangement from the beginning.
How Much Financial Support Is Reasonable?
You’ll naturally want to give your child or grandchild as much financial support as you possibly can without putting yourself at risk.
For some parents, helping out with purchasing costs is all they can do. Others, however, may be able to contribute a hefty sum towards a deposit or offer support through a family guarantee home loan.
When deciding how much financial support you can provide, the key is to determine what level of assistance you feel comfortable providing in light of your own financial situation. Wherever possible, your support should be generous. But before it can be that, it needs to be sustainable above all else, especially if you are relying on your retirement finances
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