If you are going to be the bank of mum and dad this is what you need to know

The bank of mum and dad has been forking out around $40,000 to help their kids buy a house, research shows.

That’s the whopping figure reported in Compare the Market’s latest Household Barometer.

It also revealed 90 per cent of first-home buyers would only be able to buy a property with outside financial support.

Of those already in the housing market, around half of gen Z and millennial homeowners required financial support from their parents to purchase their homes.

The bank of mum and dad has grown to such an extent that the Productivity Commission says if it were an actual bank, it would be the ninth largest lender in the country, financing around $35 billion worth of loans.

However, parents must consider a lot before helping kids get onto the property ladder.

The impact of joint ownership

Buying a house with your offspring, where you own half, might sound like a great investment opportunity.

However, adding your name to the property title means it will be considered an investment with tax obligations.

Joint ownership requires you to put your name on the title deed, which means tax exposure due to capital gains, so tread carefully.

Using the slower market to your advantage by making an offer under the asking price is also crucial.

Arjun Paliwal, CEO of buyer’s agency InvestorKit, says: “Make sure your financing is in order before you start making offers, and let the agent know upfront that you’re pre-approved and ready to go.

“This adds confidence and urgency to your offer and shows that you’re a serious and prepared buyer.”

Guarantees can come back to bite

Parental or family guarantees have been increasingly popular over the years.

The available equity many long-term property owners have built up in their homes has made guarantees a popular option, according to Zippy Financial director and principal broker Louisa Sanghera.

“In essence, a parental or family guarantee is when a parent or family member uses the equity in their home as security against a loan taken out by their child or family member,” Ms Sanghera said.

“For example, if a mum or dad has $500,000 equity in their home, this can be used as security against their child’s mortgage.”

If you go guarantor, bear in mind you’re liable for the entire sum you’ve promised to cover, which can be tough given that first-home buyers are facing cost-of-living pressures.

“Guarantees come with potential positives and negatives for both parties, which means everyone needs to understand the commitment they are undertaking,” Ms Sanghera said.

Helping one, helping all

So you have one child ready to purchase property, and you are prepared to help them. That’s great.

However, you need to consider whether you will extend the same financial lifeline to your other children.

It helps to have the same questions before helping any child through the bank of mum and dad.

For example, consider whether the child is married or has children. Do they run a business? What do they do for work? What is your relationship with them like? And have they demonstrated good savings habits in the past?

If you have provided financial support it won’t take long for the news to spread, so be prepared to explain your decision.

Have an exit strategy

If you’re considering being a guarantor, make a plan to remove the arrangement as soon as possible.

An exit strategy enables you to be released from the guarantor arrangement.

Refinancing to an 80 per cent LVR as quickly as you can is the best way to do this, which can be achieved by making additional loan repayments whenever you can and keeping a close eye on the value of your home.

Speak to a broker about how to do this.

Manage expectations

If your financial support is to be provided as a gift, that’s great, but if it’s a loan, you need to be very clear about the expectations of when and how your child should repay the loan.

Have a very clear conversation with your child and their partner about when you expect the money to be repaid and if you intend to charge interest on the loan.

Be sure to draw up a contract and ensure a lawyer has been involved in the paperwork.

Get independent advice

If you’re planning on helping your adult child onto the property ladder, seek independent and legal advice to ensure you fully understand your risks and financial obligations.

You need to understand that being a guarantor means you are prevented from selling your property while the guarantee is in place. You’re also financially liable if your children can’t repay the loan.

Other financial implications that could impact you include retirement plans, pensions, and tax arrangements.

Ensure the agreement is not just scribbled on the back of an envelope; you want a watertight contract in place.

Originally published on view.com.au