Helping your kids with their deposit? Here's what you need to know

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Unaffordable housing prices have been one of the top water cooler conversation topics of our time.

But as property prices in some markets bounce back up this year, it is becoming harder than ever for young Australians to get their foot on the property ladder.

Given the competitive market, it’s natural for some concerned parents to help give their children a leg-up.

Fifteen per cent of parents lent or gifted money to their adult children for a home deposit, while 5 per cent went guarantor for them on a mortgage, a recent Finder survey found. Another 4 per cent provided support by paying their kids’ mortgage.

So it’s no surprise that the bank of mum and dad is one of the biggest lenders in Australia, with about $31 billion in outstanding loan stock last year, according to research from Digital Finance Analytics.

They are among the top 10 lenders, dishing out an average loan of about $79,000, which is around the amount of a deposit for an entry-level unit.

As most would agree, coming up with the hefty deposit is usually the biggest hurdle for people looking to enter the property market.

Helping your children with their deposit means they can have a property of their own sooner and get in without having to pay lender’s mortgage insurance (LMI), which can run into the thousands of dollars.

But have you ever thought about how it might affect you?

Firstly, if you refinance your own home loan to take cash out of the equity you’ve accumulated, you’re essentially borrowing more money.

If you haven’t fully paid off the property, your mortgage repayments will increase and it will take longer to pay off your home loan.

Bear in mind that if your loan-to-value ratio tips above 80 per cent, you could be charged LMI – the very cost that you were helping your kids avoid.

If you’re fairly close to paying off your property and have started thinking about retirement, a cash-out refinance could have an impact on those plans. You may need to delay retirement to be able to afford repayments on the new loan.

Godfrey Dinh, Founder and CEO of Futurerent, said it’s always a good idea to keep any financial agreement between you and your children clean and simple where possible.

“It can get complicated when parents borrow against their own property to help out with a deposit, or act as a guarantor for their child’s loan,” he said.

An alternative to these options is to offer cash straight up.

“If you have the ability to simply provide a cash contribution, you won’t need to worry about impacting your own borrowing capacity, or being liable for your child’s loan if they’re unable to make the repayments,” Mr Dinh said.

“While a lot of people have equity in their property, they don’t necessarily have the free cash. This is where Futurerent’s been able to help a number of generous parents helping their kids buy a home.”

What to think about before helping your child with their property deposit

  1. Set yourself a limit – The bank of mum and dad shouldn’t be a limitless one. Have a long, hard think about how much you’re willing to lend or gift and how much your kids actually need.
  2. Consider offering a cash contribution – It could be a good idea to avoid using your own property as security as this could be risky and costly for yourself down the track. A pure cash contribution could take those risks out of the equation.
  3. Sit down with the kids – It’s important to make sure everyone is on the same page – is it a loan or a gift? How much are you ready to offer? If you’re opting for a loan, consider getting it in writing in a formal loan agreement.
  4. Understand your children’s financial habits – Be certain that your children can and do save regularly before you commit to lending or gifting them money. If you’re going guarantor for them, make sure they can make repayments over a long period of time.

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