Sarah Megginson is senior editor of home loans for Finder and has worked as a finance and property journalist for more than 15 years. Sarah was previously managing editor of Australian Broker magazine, Your Investment Property magazine and online home loan comparison site, Your Mortgage.
It’s only natural to want the best for your kids, from enrolling them into a good school to empowering them to make smart choices and helping them out financially as they get older.
What is “the Bank of Mum and Dad”?
For many parents, lending a helping hand on the money front is an experience that doesn’t end when the kids move out. In fact, according to Finder’s recent research, the “Bank of Mum and Dad” is alive and well, with 44% of parents admitting they financially subsidise their adult kids’ lives.
Nearly a quarter (23%) of Australian parents revealed that they help out their adult kids with day-to-day expenses like groceries, while around 17% allow their adult offspring to live at home without paying rent.
In doing so, most parents believe they’re doing the right thing and giving their kids the best start in life – but you shouldn’t prioritise your kids’ needs to your own detriment, warns Graham Cooke, insights manager at Finder.
“Helping your kids is how many [people] see the job of a parent, but mum and dad need to make sure they aren’t putting their own financial position at risk in the process,” he says.
“The last thing anyone wants is for the Bank of Mum and Dad to go bust.”
One way that many parents seem to be stepping up is by making an effort to help their children get their foot on the property ladder. What are the options?
Going guarantor on your child’s home loan
If you have a decent amount of equity in your home, meaning your loan balance is far lower than what the property is worth, then you may be able to act as a guarantor on your child’s loan. This is also known as a family pledge loan.
This is a huge gift, as it not only helps them side-step the need to save a deposit, but it also saves them from paying Lenders Mortgage Insurance, which can cost upwards of $10,000.
But what does it actually mean for you to ‘go guarantor’ on your kids’ home loan?
Essentially, when you act as a guarantor for a home loan, it means you are committing to making the mortgage repayment in the event that the primary borrower (your child) can’t.
There are a few risks to be aware of if you decide to do this. Probably the biggest risk is that you are using your own home as security. In the worst-case scenario where your child falls seriously behind on their repayments, this puts your own home at risk.
However, there are alternatives to going guarantor that could help your children get their foot on their property ladder.
Gifting or lending a home deposit to your kids
Stumping up a deposit – or at least, contributing a decent down payment – towards your kids’ home loan deposit is certainly going to give them a financial leg up. Right now, thanks to the First Home Loan Deposit Scheme, it’s possible for first home buyers to borrow with just a 5% deposit, without paying any LMI. If you can contribute towards this deposit, you may be able to help your child get into their own property, without involving your own home in the process.
Empowering your kids to make smart financial choices
Outside of contributing to your adult kid’s home loan, the best way you can help your kids financially is to empower them to take an active role with their money and encourage them to take control of their finances.
The Finder Fitness 4-week challenge is a great place to start. It’s a simple, straightforward set of modules that helps you and your kids understand how to manage your money so that it works for you and helps you move forward with your finances.