Keys to the Castle: Smart Ways to Help Your Kids Buy Their First Home

When it comes to helping your kids get into the property market, the options are as varied as the challenges. As property prices continue to climb, many parents are stepping in to lend a hand. But before you dive in, it’s worth understanding the different ways you can help, as well as the potential pitfalls. Now if your question is whether to own your own home or to buy an investment property, you should refer back to my previous article (Rentvesting: A Modern Path to Home Ownership ) which discusses this in detail. This article though is for options of a buying a property so let’s explore the most effective strategies and the considerations that come with each one.

Important to note: I should also say, this is a much longer article than normal as it is the most requested and discussed topic of my peers and their children, and so have spent more time outlining these, as well as my most preferred option for my own children (not advice) and a mini case study at the end.

Option 1: Buy the Property for Them

Imagine this: you’ve built up a nice little nest egg, maybe through capital gains, a bit of inheritance, or even drawing down from your superannuation. You decide to buy a property and let your kids live in it, charging them a token rent to cover costs. This way, you maintain control over the asset while providing a home for your children. It’s a generous gesture that also safeguards the property from potential financial or relationship troubles down the road.

However, while this arrangement can work brilliantly, it’s not without its headaches. For one, you’ll need to navigate the tax implications—think rental income, land tax, and the potential for capital gains tax (CGT) when the property is eventually sold. And don’t forget about those unexpected life events, like divorce or dementia, that could complicate things further. A chat with a financial planner, accountant, and property lawyer is a must before you make any big moves.

Option 2: Give Them a Cash Gift

Perhaps the most straightforward way to help is to hand over a lump sum for a deposit. It’s quick, it’s easy, and it gets your kids into the market faster. But here’s the catch—once you give the money, it’s gone. If life throws you a curveball and you need those funds later, you might find yourself in a tight spot. And then there’s the risk of a relationship breakdown (my biggest concern) or even your child’s untimely passing, which could see that money end up in the wrong hands.

To protect your gift, consider setting up a legal agreement or purchasing the property as “tenants in common,” which allows you to control where your share goes if something happens. Just remember, the bottom line is to always seek legal advice before gifting a large sum, especially as you approach retirement.

Option 3: Provide a Personal Loan

If the idea of a gift feels too risky, a personal loan might be the way to go. By lending the money instead of giving it outright, you maintain some control and ensure that the funds can be repaid, especially if your child’s relationship hits a rough patch. You can even structure the loan to be forgiven upon your passing, or sooner if your child’s financial situation improves.

However, like any financial arrangement, this needs careful planning. The loan should be properly documented (terms, interest rates, repayments etc), and ideally, secured against the property. This way, you protect your interests while giving your child the boost they need to get into the market.

Option 4: Act as a Guarantor on Their Mortgage

This is where you can really make a difference without dipping into your savings, and where many of my client’s felt easiest with. By using the equity in your own home, you can act as a guarantor on your child’s mortgage. This increases their borrowing power and can help them avoid the dreaded ‘lenders’ mortgage insurance’ (LMI). It’s a great way to help, especially if your child’s income or savings are just shy of what’s needed.

But here’s the thing—being a guarantor isn’t without its risks. If your child defaults, the bank could come after you for the guaranteed amount. That’s why it’s crucial to have other assets besides your home to cover this, just in case. I should also say, this is different if you were the guarantor of your child’s business loan as you would be up for 100% of that loan, which many mistake is the same for this type of guarantee whereas in this case, you are only guarantor for your portion (as main security is your child’s property). So, while it’s an excellent option for many, it’s not for everyone, so make sure you fully understand the implications before signing on the dotted line.

Option 5: Teach Them to Budget and Save

Sometimes, the best help isn’t financial at all. Instead of focusing on how much you can give, think about what you can teach. Guiding your child through the basics of budgeting, saving, and managing a mortgage can set them up for success in the long term. You may have a financial adviser or coach for your own situation or retirement for example, why not get them to run a mini class on money 101, the lessons learnt can help set them up for the rest of their life. After all, when it comes to buying a home, it isn’t just about getting the keys—it’s about being able to keep up with the payments and responsibilities that come with it.

Option 6: Seek Professional Advice

No matter which route you choose, getting professional advice is non-negotiable. Financial planners, accountants, and property lawyers can help you navigate the complexities of each option and ensure that your decision is the right one for both you and your child. They’ll also help you consider the future—whether it’s reviewing your will, setting up the right ownership structure, or simply making sure everything is in place to protect your family’s wealth across generations.

Final Thoughts

Helping your child get onto the property ladder is one of the most significant and rewarding things you can do, but it’s not without its challenges. By carefully weighing your options, considering the long-term implications, and seeking professional advice, you can make a choice that benefits everyone—both now and in the future. After all, the goal is to give your child a head start without putting your own financial security at risk.

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Option 4: Act as a Guarantor on Their Mortgage

If these options are something you wish to consider for your child, I feel prudent to provide a bit more information on the most preferred path (based on my research and analysis) for many of my clients over the years. Everyone is different though and I have had clients use each of these options and you just need to see what works best for you and your child based on getting appropriate advice.? Acting as a guarantor on their mortgage approach for me strikes a balance between providing significant assistance and mitigating some of the risks associated with other methods like outright gifting or buying a property for the child. Here’s why this option is frequently used:

Advantages of Acting as a Guarantor (Option 4):

1. Increases Borrowing Capacity:By using the equity in their own home, parents can help their children secure a larger loan or avoid costly lenders’ mortgage insurance (LMI), which is typically required when borrowing more than 80% of the property value.
2. No Immediate Cash Outlay:Unlike gifting a deposit or buying a property outright, acting as a guarantor doesn’t require parents to deplete their savings or retirement funds. This allows them to retain control over their finances while still supporting their child.
3. Retains Child’s Independence:The property is in the child’s name, which encourages them to take full responsibility for the mortgage and home ownership. This helps to foster financial independence and discipline.
4. Potential to Remove Guarantee:Once the child’s financial situation improves, they can refinance the mortgage and release the parents from the guarantee, reducing the long-term risk.

Risks and Mitigation:

• Risk of Default: If the child defaults, the guarantor is liable only for the amount secured by the guarantee, which could potentially put the parents’ home at risk.Mitigation: To mitigate this risk, parents should ensure their child has a solid financial plan and consider setting a limit on the amount guaranteed (e.g., only the deposit or a percentage of the loan).
• Emotional and Financial Strain: Guaranteeing a loan can cause stress if the child struggles financially or if the relationship sours.Mitigation: Clear communication, a formal agreement, and ongoing financial guidance can help prevent misunderstandings and financial difficulties.

Comparison to Other Options:

• Buying Property for the Child (Option 1): Provides full control and asset protection but requires significant capital and brings complexities such as tax liabilities and potential family disputes.
• Gifting Money (Option 2): Simple but risky, as the funds are not recoverable and could be lost in a divorce or if the child passes away.
• Providing a Loan (Option 3): Offers a middle ground but requires careful structuring to avoid complications with mortgage lenders and ensure enforceability.

Acting as a guarantor is a versatile and balanced approach that allows parents to help without depleting their resources or losing control. While it carries some risk, this can be managed with proper planning and advice, making it a sound option for many families.

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Case Study: The Martins Support Their Daughter’s First Home Purchase

Background:

Sarah Martin, a 27-year-old marketing professional, has been saving diligently for her first home. Despite her efforts, the steep property prices in Sydney have made it challenging to accumulate the 20% deposit needed to avoid lenders’ mortgage insurance (LMI). Her parents, David and Helen Martin, are financially secure, with significant equity in their family home, and wish to help Sarah purchase her first property without compromising their own financial future.

Challenge:

Sarah has saved $60,000, but she needs $180,000 to cover a 20% deposit on a $900,000 property. With her current savings, she would need to borrow 93% of the property value, which would trigger costly LMI and significantly increase her monthly repayments.

David and Helen considered gifting the additional $120,000 needed for the deposit, but they were concerned about potential risks such as the impact on their retirement funds and the possibility of losing the money if Sarah’s relationship with her partner were to break down.

Solution:

After consulting with their financial planner and mortgage broker, the Martins decided that David and Helen would act as guarantors for Sarah’s mortgage. They agreed to secure up to $120,000 of Sarah’s loan using the equity in their family home. This allowed Sarah to borrow the full amount required without having to pay LMI, despite only having $60,000 saved.

Outcome:

1. Increased Borrowing Power: With her parents acting as guarantors, Sarah was able to secure the $840,000 mortgage she needed to purchase the $900,000 property without incurring LMI, saving her tens of thousands of dollars over the life of the loan.
2. Preserved Parental Wealth: By acting as guarantors rather than providing a cash gift, David and Helen protected their savings and superannuation, ensuring they could maintain their retirement plans without jeopardy.
3. Future Flexibility: Sarah’s financial plan includes increasing her income and making extra repayments on the loan. In five to seven years, she aims to refinance her mortgage, which would allow her to release her parents from the guarantee, thus eliminating their financial risk.

Managed Risk: The Martins capped their liability by limiting the guarantee to $120,000, a manageable amount should the worst-case scenario occur. They also structured the guarantee so that it could be removed once Sarah’s equity in the property reached 20%.

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Article by Marc Bineham – Money coach, speaker and award-winning author of The Money Sandwich