All parents want the best for their children. A study of more than 1,700 Australians commissioned by finder.com.au found that 86 per cent of parents provide financial help to their adult children, with lending money and cash handouts the most popular ways they contributed financially.
But while it’s natural to want to help your children buy a home, you could be putting yourself at risk of destroying your financial security. We’ve seen many parents financially ruined through backing their children going guarantor for a loan and losing everything.
You’ve worked hard for your money and it has to last longer as we live longer. In this article we share some of the different ways you can help your kids buy a home and their varying degrees of risk. Work out what’s best for your situation so that you don’t risk sacrificing your own retirement goals and financial security.
Give your kids the money
This is the simplest method to help your children buy a home – no strings attached cash in the bank. Your children can buy what they want, when they want and you won’t be disappointed if you don’t see the money again because you haven’t set any expectations.
This option, however, is only applicable if you have so much money that you’re happy to give it away. It’s also not a method we’d generally advise as it doesn’t help children build financial independence and healthy money habits.
Be aware that most banks will still want to see a record of savings, so make sure your children have a good mortgage broker to help them navigate the right lending options.
Buy with your kids
This option can either make or break your relationship with your child, so tread carefully when considering it.
If you’re going to do it, it shouldn’t be because they want a pricier property. It would be more valuable to teach your children to learn to compromise and live within their means.
We recommend you help with the deposit only so you’re on the title deeds, but not the mortgage. That way you won’t get stuck with mortgage repayments if things go pear-shaped. Your child will be on the property ladder and, over time, you’ll both hopefully walk away with equity when the property value increases.
Match your children’s savings
When you’re young and trying to save up for a first home deposit, your income may not match your ambition. Saving a high percentage of your salary is as much as anyone can do, but sometimes it’s just not enough.
A great way to help your child buy a home is to match their savings. For example, for every dollar they can save, you’ll put in two. In this case, to get together a $100,000 deposit, they’ll only need to save $33,000.
Still a big challenge, but you’re bringing the goal a lot closer to them without taking away the hard work and achievement. You’re teaching them good money habits and helping them build financial independence too.
Lend your kids the money
Much better for you than simply giving money away, you can lend money to your children with the expectation that they’ll pay it back.
Whatever you agree to, make sure you have it in writing because sometimes things do go wrong. If you don’t feel comfortable getting your children to sign a loan contract, consider it protection for the family. If they divorce or have business troubles, the family should be able to get the money back before the assets are sold and divided up.
We always recommending lending the money through a third party, like an accountant or solicitor. This puts clear rules in place and helps take the pressure off your relationship.
Offer a family guarantee
One of the most popular ways of helping the next generation into the property market is sharing your house equity with your children. A bank will take security over your property for the deposit and costs and then lend up to 100 percent of the purchase price plus costs to your children.
If you’re comfortable that your children can afford the property and are responsible with money, it might work well for you all. But there is the risk you’re responsible for up to 20 percent plus costs so clear rules need to be established.
For example, as soon as their debt has been reduced, and their property has gained sufficient value, they have to refinance you out. If they fall behind in repayments, they must sell rather than tapping you for more money. We also recommend you limit the guarantee to a particular dollar amount. Never give an unconditional or unlimited guarantee.
Build your children’s financial independence
Teaching your kids about money should be a priority, particularly when they’re young. Instilling good saving habits early on is the best financial gift you can give them, and they’ll thank you when the time comes to start saving for a home deposit.
Pocket money is a great way to teach your kids valuable lessons about saving and the value of money. Pay them for jobs they do, rather than automatically. Give them an incentive by matching their savings dollar-for-dollar when getting them started and encourage them to set financial goals.
We share lots of ideas to help you instil good money habits in your kids in our ebook “The Secrets of Raising Money-Wise Kids”.
Tell your kids to suck it up
Finally, you may not be able or want to help your children buy a home. If something goes wrong and you’ve lent money or offered up equity in your house, it could set back your retirement plans. It’s great to your children out, but not at the expense of your own financial future.
It’s never been easier to borrow money in today’s economy and interest rates are at record lows. As parents, we paid 17 percent interest, went without the flashy cars, gadgets and overseas travel until we had built a stable financial foundation for ourselves. It can be done, and there are plenty of millennials doing it.
Make your decision carefully and get advice along the way to make sure that you’re aware of your options and their possible implications.
And remember, sometimes the more loving thing you can do as a parent is to help your children build financial independence on their own. Making sure your kids know there isn’t any help coming can be the greatest help of all.