With property prices edging higher and higher, it has become a daunting task for a first home buyer to purchase a home. Nowadays, one would require around $100,000 just to pay a 10% deposit on a $600,000 property plus allow add on costs such as stamp duty, legal gees, and mortgage insurance costs.

Faced with the uphill battle of scraping up a decent sum to buy a property, children often look to their parents for some assistance in some way.

You can help your kids with a deposit. Here are a few options how you can do this:

  • The most common way is you can provide cash funds by way of a straight gift or a loan. If you gift the money, you need to be aware of the unfortunate circumstance if your child suffers a marriage breakdown. The money will form of your child’s family asset pool and you potentially can lose half of your money to your child’s ex-spouse. The better way is to lend the money to your child. This way, your child has the legal obligation to repay you back and the loan is deducted from the family asset pool.

Also, you can place a caveat over the property as a security measure. If you don’t have savings to gift or lend, then you could consider lending it from your SMSF on commercial terms. Beware, you can’t lend more than 5% of your super balance otherwise, you will breach the in-house asset cap rules under the superannuation law;

  • You could provide a limited guarantee to the bank for the difference between what the bank is prepared to lend your child say 95% of the property’s value and the remaining funds being deposit (5%) plus stamp duty and other add on costs. For example, if the purchase price is $800,000 and your child has savings of $40,000 (being 5%), then the bank lends 95% and you can provide a guarantee of up to $164,000 being 15% of $800k, i.e. $120,000 plus roughly 5.5% for costs.

Your child will avoid mortgage insurance cost which is normally applicable if one borrows more than 80%. Once the property increases in value to a level where the debt to equity ratio is 80% or less, you can then ask for a release of your limited guarantee;

  • You can jointly own the property with your child as tenants-in-common. This reduces the amount of loan funds required from the bank and thereby, reducing the interest cost.

By all means help out your kids where you can, but don’t let this ruin your retirement goals as you need to live comfortably too during retirement. Children need to learn to borrow responsibly and not over extend themselves in the end.