The parent trap: should you loan to your kids to help them buy?

30/11/2020 | Bizink

More young people are turning to parents for financial assistance with the purchase of their first home, but is lending money from ‘the bank of mum & dad’ a good idea? Or should you be guiding your children towards other options?

The ‘Great Australian Dream’ has always centred around owning property, and as a parent, it’s only natural to want to help your kids enter the property market as early as possible. The state of todays financial climate however, means that living the Aussie dream is getting harder for young people.

If you’ve found yourself in the position to provide a deposit, go guarantor or lend some money to a child looking to enter the market, here’s a few things to consider before opening up the bank.

The Pros

Monopolising Opportunity

In today’s market, young people are generally leasing for the equivalent of a mortgage repayment. Instead of paying off their own home loan, it’s likely they’re successfully paying off someone else’s.

Because of this, it can take years to save for the 20% deposit required for most mortgages. During those years there are valuable market market opportunities that may be missed due to insufficient funds – so lending to your child if they’re a bit short on the deposit can give them a chance to take advantage of a buyer-friendly market and lower interest rates.

More Attractive Choices

Maybe your child has successfully saved for the deposit, but not quite enough to get their borrowing capacity into the range they’d like. If you’re in the position to, topping up your child’s funds with a loan or donation might end up the difference between a place they can afford, and a place they love.

Avoiding Fees & Costs

Lending your child some extra funds could, in some cases, help reduce fees and costs from a financial institution. This is a very general statement however and it’s recommended to get financial, legal and tax advice for your specific circumstances.

If you book in with one of our finance specialists, they can give you an idea of if you’ll be required to pay tax on any money gifted to your child, whether you can provide them with an interest-free loan, and if a legal contract should be drawn up.

The Cons

Straining Your Relationship

If your child has a strong credit history, a reliable source of regular income, and you know they’re fairly responsible with their money then entering into a loan agreement should be a-okay. But, family and finance can make relationships tricky – the last thing you all want is tensions arising over a loan arrangement.

If your child misses payments, fails to meet deadlines or starts taking advantage of any flexibility your provide, this can cause trouble. The best way to preempt this situation is a formal loan contract outlining the loan amount, expected repayments and all deadlines. We recommend having a legal professional review the agreement before it’s signed.

Added Conflicts

While we all want to believe it will never happen, situations do arise that can cause a falling-out between you and your child. Disagreements over inheritance, divorces or separations, tensions with their partner – in these scenarios you may regret gifting money to your child, or find them refusing to pay back the loaned funds.

If your child goes through divorce, their former spouse may be entitled to part of all assets including the funds you’ve loaned. Make sure you put a clause or two in any loan contracts to help protect yourself, and your child, in this situation.

Missing Other Opportunities

If you’re not in a place to financially contribute to your child’s first home funds, it’s not the best move to push yourself to do so.

Even if you can easily lend them the funds, make sure you’re not going to need them or regret giving them away in lieu of investing, renovating your home, adding towards your retirement, or going on the holiday of your dreams. If you do lends funds to your child when you can’t really afford to do so, this can be a cause of tension and resentment down the line, which we’re sure you’d like to avoid.

Bank of Mum & Dad Open?

If you’ve carefully considered all the pros & cons, and make the decision to lend or gift money to your child to help them enter the property market, make sure you do set up an agreement that provides the best possible outcome for all parties. Research, draft up a formal agreement, consult the experts and make sure all parties sign where they should.

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