How to help grown-up kids into their first home

This article is brought to you by ME.

When your adult children start looking for a home of their own, don’t be surprised if they ask for a financial helping hand.

High house prices are making it challenging for first home buyers to get a foothold on the property ladder. ME research found that 20% of Australian families have provided financial assistance to help the next generation into their first home.

That’s just one of several research findings by ME Bank, which shows that families are exploring a variety of options to support younger relatives in their home buying journey. 

Gifting a cash deposit

According to ME, loans or gifts are the most common form of financial assistance, with 22% of first home buyers saying they received a gift or loan. In fact, the amount being loaned or gifted between family members to buy property has risen to $42,000 within the last five years.

Sure, not all families have that sort of spare cash available. But even where they do, it pays to be aware that lenders still need to be confident the home buyer can manage their regular home loan repayments.

Family loans

The ‘Bank of Mum and Dad’ is not particularly new. What is different, according to ME, is that these days 24% of parents are charging their adult kids interest – often as a means of providing a life lesson about the value of money.

Acting as guarantor

ME’s research found that 5% of first home buyers have the backing of parents agreeing to act as guarantor. This can help buyers get into the market with a very small deposit, and often provide a means of sidestepping lenders mortgage insurance. Nonetheless it does incur risks for the guarantor.

If the borrower defaults, the guarantor can be called on to pay off the entire loan – something that can leave older parents financially worse off, while also causing considerable family friction. The guarantor’s ability to borrow for other purposes, including emergencies, can also be seriously compromised.

Agreeing to be a co-buyer

According to ME, 14% of first home buyers have purchased jointly with a family member. Again, it is not an option available to all families, though it does provide an opportunity for older parents to build equity in their child’s home.

Importantly, boomer parents acting as co-buyers need to have an exit strategy in place so they’re not left working for longer just to pay off their child’s home.

Co-buying between friends and siblings

One other first home buyer strategy noted by ME is the teaming up of siblings (12%) or friends (4%) to buy a home.

By pooling resources, buyers can afford a better quality property or a more desirable location. Running costs like rates and insurance can also be shared. 

That said, it pays to think long term. Rather than hoping everything will work out, have a solicitor draft a co-ownership agreement that addresses all possibilities – including what will happen if one owner wants to sell up further down the track.

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