Published at: 6/21/2016 3:29:22 PM
A growing number of mums and dads are helping their adult kids into a new home. But is it the best strategy for everyone?
You know the story. Mum and dad have built up a stack of home equity. Their adult child is struggling to buy a first home. Offering a financial helping hand can seem like a natural act of kindness. However declaring the ‘bank of mum and dad’ open for business can also have hidden downsides.
Among the one in three Gen Ys (aged under 35) who plan to buy a first home this year, many will turn to their parents for some fiscal support. There’s nothing especially new about parents lending a hand this way however these days parents have a range of options to help out. All come with upsides – and potential drawbacks.
Let’s weigh up the possible choices.
1. Gifting a cash deposit
Not every family has a casual stash worth tens of thousands of dollars just begging to be handed over no-strings-attached to an adult offspring. Even where this is the case it may not be a cure-all.
Lenders still want to see evidence of regular saving that demonstrates a home buyer’s ability to manage regular home loan repayments.
2. Acting as guarantor
Guaranteeing your adult child’s loan can help them secure a home loan with only a small deposit, and it can be a way to avoid lenders mortgage insurance.
But it’s a risky strategy. If the borrower defaults on the loan, the bank will turn to the guarantor to make good with the loan. That can leave older parents financially skewered and cause some solid family friction. Meanwhile, the guarantor’s ability to take out a loan or other credit for their personal needs can be seriously compromised.
If you plan to take this route, be sure to speak with your solicitor so you enter the agreement with your eyes wide open.
3. Agreeing to be a co-buyer
Taking on financial responsibility for another property isn’t everyone’s idea of a quick solution but at least as a co-owner you have an opportunity to build equity in the place. Drawing up an agreement about managing shared costs and responsibilities can help everything run smoothly.
Be aware though, paying off a property when you’re aged in your 50s or more can really take the ‘boom’ out of being a baby boomer. Have some sort of exit strategy in place to ensure you’re not lumbered with working well into your senior years just to pay off your child’s home.