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Parents can pay a high price for boosting their kids onto the property ladder

Entering into a financial partnership with family can be fraught with unexpected danger, because while blood is thicker than water, money can dilute the closest familial ties.

With housing affordability continuing to plague young, would-be homebuyers, more children are turning to their parents for a boost onto the property ladder. But what is the real potential cost for parents and their offspring in this scenario?

According to an article in the Sydney Morning Herald, some mums and dads who have the financial means to help their children escape the rental rat race are happily handing over a big, fat deposit cheque and thinking little of it.

Others though, feel pressured to offer their support in the only way they can – by going guarantor for their child to secure a home loan. And in doing so, some are putting themselves in a position where they could end up losing their own home if things go pear shaped.

The road to bankruptcy is paved with good intentions

Insolvency and Trustee Service Australia reports that during the 2010/11 financial year, 405 people went into bankruptcy due to liabilities on loan guarantees.

This is the worst-case scenario and a real possibility that a parent guarantor has to be prepared for if their child over-commits or their personal circumstances change, and they can no longer afford to make the repayments.

Because in that case, the lender will look to you to either meet that monthly obligation or more likely, pay out the loan entirely.

So what are mum and dad to do?

Head of the financial advisory division at Dixon Advisory, Nerida Cole, says a lot of parents want to know how to best help their children escape the tenancy trap and move into their own home.

“We look for ways to do it and limit their liability at the same time. If they can lend their child some money, that is preferable,” she says.

”Risking $20,000 or $50,000 is better than risking your home.”

Alternatively, says Cole, parents can contribute a certain amount of their own income to help with the monthly repayments, as long as they have reliable cashflow to do so.

Cautionary tales

Principal solicitor at the NSW Consumer Credit Legal Centre, Katherine Lane, advises against parents acting as guarantor under any circumstances.

”There is always an issue,” she says.

“Parents love their children and want to help them and they assume that everything will work out. They don’t understand the risks.

”One of the things people don’t realise about these arrangements is that if the child defaults, the lender will usually want the loan paid out. Guarantors assume they will be asked to take over the repayments for a period of time, while things get sorted out, but that is rarely how it works out.

”The risk you are taking is that you will turn a financial crisis into a family breakdown at the same time. I tell people they are not doing their child a favour if they lose their home at the same time the child is losing theirs.”

Lane says she sees one or two cases a month where loan guarantees have landed people in trouble.

Options to consider

For some parents, the idea of watching their child struggle is too much to bear and they will want to help them no matter what. But there are ways to do it without risking your own financial wellbeing. Some of the less risky possibilities include;

  • Giving a monetary gift
  • Lending what you can afford (and afford to lose if they can’t pay it back!)
  • Buying the property as an investment and charging rent so they can help to make the repayments.
  • Buying the property together in a partnered investment scenario, allowing you to use the equity in your home as security and share the ongoing cost of the mortgage.

Personally, I think the best gift a parent can give their child is a healthy respect for money and valuable lessons in sound financial management. As the old saying goes, “Give a man a fish and he eats for a day, teach him how to fish and he’ll eat forever.”

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Parents can pay a high price for boosting their kids onto the property ladder' have 2 comments

  1. Avatar for Property Update

    September 10, 2012 @ 4:23 pm David

    ” healthy respect for money and valuable lessons in sound financial management”
    like this article today by another David http://www.news.com.au/money/david-and-libby-koch/koch-dont-share-everything/story-fn7kicty-1226470935209 teaches us what to teach kids as they grow up.
    For me other then getting financially free, teaching the next generation the right mindset is my goal so that they can add to it and hopefully pass it on. Difficult as my wife and I do not want to pressure them too early or too much as they deserve to have fun. A delicate balance with so much to learn, too bad schooling dont teach these lessons like goal setting…

    Reply

  2. Avatar for Property Update

    September 10, 2012 @ 4:34 pm Michael Yardney

    David
    I agree with you. It’s not what you leave your kids – it’s what you leave in your kids

    Reply


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