Today’s younger generation and professionals are faced with the challenge of rising real estate property costs, particularly in the bustling metropolitan areas and central business districts (CBD) in Australia. Surprisingly and despite the costs, these young ones are not deterred by it, especially when they get some sort of assistance from their parents.
In Australia, real estate property costs continue to go up and studies have shown that parents have never been more supportive. Parents helping out kids especially when it comes to real estate have been known and has emerged as one of the fastest-growing segments of mortgage lending recently.
Here’s how it is done.
Help out as a “sort” of a cash loan
This is a common practice by parents to help out by lending money to their kids in the form of a cash loan. Surveys revealed that well-meaning parents could not bear watching their kids struggle to make it through and help kickstart their real estate journey process by extending a helping hand.
Many parents often resort to this practice when kids have trouble securing a home loan or mortgage, due to insufficient credit history or income capacity. These cash loans come without pressure on payment arrangements to dad or mom.
However, parents need to be smart and educate their kids about the process by making a written contract to document a mutual payment agreement, which helps instil the discipline of keeping up with payment commitments which they can later take as a learning experience when faced with real-world challenges and opportunities.
Another common practice by parents is to help out by agreeing to a guarantor loan. This allows parents to free up equity on their property to help children come with an amount for a deposit on their first home purchase.
However, parents also need to consider that in case the children default on their repayments, the bank or lender will turn to the parents and compel them to repay the loan, which could go to the extent of parents losing their property in case it was put up as collateral for the loan.
For the more affluent ones, parents sometimes consider giving their children a cash gift as a deposit or an early inheritance for use as payment. However, parents must be mindful of their financial standing and welfare, which can be a source of stress, especially when considering their future health, medication, or financial stability when the situation comes knocking at their door.
Shared ownership of a property with children is another option explored by some parents. The practise involves both children and parents sharing ownership of the property and have it documented on the property’s title.
This is worth considering for parents in ensuring that a Property Sharing Agreement is mutually approved by both parents and children to ensure that the property is protected and be entitled to shares in the capital gains of the property when it gets sold.
While parents are simply taking on the responsibility of helping out their kids by offering these options to help them get ahead by acquiring a property, it is also important to consider protecting themselves by making sure that their kids keep their end of the bargain and take their responsibilities and obligations seriously to avoid long-term problems.