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The average age of first home buyers keeps increasing, with more young people turning to their parents for financial help. But is lending your children money from the “bank of mum and dad” right for you?
Owning property has always been the great Australian dream. As a parent, it’s natural to want your kids to get onto the property ladder as early as possible. But the state of today’s property market and financial climate means that living that dream is getting harder and harder for many young people.
For those whose parents are in a healthy financial position, taking a low-interest loan from mum and dad could be the best first step to getting on the property ladder.
“Lending to a child who hasn’t been able to save up for a deposit could give them the chance to take advantage of a buyer-friendly market and lower interest rates.”
If you’ve found yourself the manager of such a bank, and you’ve been considering opening for business – giving money, loaning a deposit or acting as guarantor – here are a few things you should weigh up first.
THERE ARE PROS…
Today’s rising rental prices mean the money your child is paying to lease is likely the equivalent of what many people pay on a mortgage. Instead of paying off their home loan, they’re helping pay off someone else’s.
They might not have any other option since saving up enough for a 20% deposit can take years. But in those years, rare dips in the market and opportunities to earn precious capital gains could be missed.
Lending to a child who hasn’t been able to save up for a deposit could give them the chance to take advantage of a buyer-friendly market and lower interest rates, too.
Access to more attractive choices
Perhaps your child has managed to save up for a deposit – but not enough for the type of place they had their heart set on. Boosting your child’s savings with a gift or loan could be the difference between something that’s not ideal, or the home of their dreams.
Avoiding certain fees and costs
Giving or loaning your child money could help them avoid fees and costs from a financial institution. To get a clearer understanding of how this applies to your specific situation, it’s best to get financial, legal and tax advice.
Advisors can help you answer questions like whether you need to pay tax on the money you gift your child, whether you’re able to offer your child an interest-free loan, and whether you need to pay a solicitor to legalise a contract.
… AND THERE ARE CONS
Putting a strain on relationships
Family and finance can make for a tricky combination. The last thing you’re after is a fractured relationship with your child, caused by tensions arising over a loan agreement.
If your child has a strong credit history, a stable income and is generally responsible with money, you might not run into any trouble. But if they miss payments, fail to meet deadlines or start taking advantage of your flexibility, the situation could get tense.
One way to avoid this is to draw up a contract that clearly outlines repayment dates, deadlines and amounts. You should also have a legal professional look over it before it’s signed.
Added conflict in difficult times
Of course, even though you’re sure it could never happen, there’s always a chance of a falling-out between you and your child for another reason – like disagreements over inheritance, divorce, separation, or tensions with their partner.
If these worst-case scenarios occur, you might find yourself regretting gifting money, or in a tough situation where your child refuses to repay the loan.
If your child goes through a divorce, their former spouse may be entitled to half of all assets – including the money you’ve loaned. You can address these issues before they have a chance to happen by adding a clause or two into the contract to protect you.
Missing out on other opportunities
If lending money to your child will tighten your purse strings considerably, it may not be the best move. And even if you can comfortably lend to your children, be aware that it might prevent you putting your money towards other endeavours – like starting a business, going on the holiday of your dreams, renovating your place or investing for retirement.
Decided to go ahead?
If you’ve weighed up the pros and cons and decided you can and should commit to helping your child buy a home, make sure you set the agreement up in a way that ensures the best possible outcome. Do your research, speak to the experts, and get everything down on paper – and make sure all parties sign on the dotted line.