With sky-rocketing house prices, high interest rates on home loans, and raising cost of living making saving a deposit harder and harder for everyday Australians, ‘the bank of mum-and-dad’ are increasingly stepping in, to help children reach their goal of homeownership sooner. But for parents, what is the best way to help your kids buy a property? And how can you make your money work harder?
In this article we’ll explore three key ways you can help financially support your children to reach their goal of home ownership. Each strategy comes with its own set of advantages and risks, we break down common ways to help your kids buy a home, so you can make the right choice for your family’s financial future.
1. Becoming a guarantor on their home loan
One of the most common ways Australian parents help their kids buy a home is by acting as a guarantor on their child’s borrowing. This means using your own property as security, to reassure the lender that there is means to pay the loan, should your child default. This method can allow your child to borrow more and avoid lender’s mortgage insurance (LMI) in most instances.
Pros:
- Avoids costly LMI– this could potentially save thousands of dollars
- Increased borrowing potential- a guarantor can help children qualify for a bigger home loan with better terms
Cons:
- Financial risk- If your child can’t make repayments, you’re financially responsible
- Personal financial impact- acting as guarantor could impact your ability to borrow for your own needs
While this strategy can be a powerful boost for first-home buyers, it comes with significant financial risk. If your child defaults on their mortgage, the bank may turn to you for repayment. This could put your home or retirement savings in jeopardy. Before agreeing to be a guarantor, it’s crucial to consider whether your own finances are secure enough to take on this responsibility and if the level of borrowing your child commits to as a result of their increased borrowing potential, is sustainable long term.
2. Gifting or loaning money for a house deposit
Another way to assist is by gifting or loaning your child money to help with a home loan deposit. A larger deposit means they’ll need to borrow less, reducing their repayments and the overall interest they’ll pay on the mortgage.
Pros:
- Cash injection- Reducing the time needed to save for a deposit, this financial boost can help children buy a house sooner, getting into the property market faster
- Reduced mortgage size and ongoing repayments
Cons:
- Repayment risk- If the money is a loan – there’s always a risk of this not being repaid or taking longer than expected. If your child is buying with a partner and they split up, have you safeguarded the return of your money in any settlement agreement?
- Impact your own financial security, especially in retirement, this could be a substantial chunk of money that could be working to generate you additional income elsewhere.
If you’re considering this option, it’s important to structure your agreement correctly. A financial gift may have tax or pension implications, while a loan should have clear repayment terms in place. Some parents even choose to formalise the arrangement legally, ensuring the money remains within the family in the event of a breakup or other financial dispute. With such an incredibly generous gift, it’s important to ensure, in unforeseen circumstances, it doesn’t sour relationships within your family.
3. Helping them start early through investing
While offering financial assistance at the time of purchase is helpful, setting your kids up early with good money habits can be even more valuable in the long run. Teaching them about saving and investing from a young age means they’ll have their own deposit when the time comes. This method also gets money working harder, especially if you intend to provide a cash injection, setting it in an investing account early means it can benefit from compounding over time and grow to an even bigger gift by the time your child wants to purchase a home.
One way to get your kid investing is to start an account on their behalf while they’re still young. A Stockspot Kids account, for example, allows parents to start investing small amounts for their children from birth, leveraging the power of compounding growth over time. Kids accounts with Stockspot are also fee free, until your child reaches 18 (or has a balance over $10,000), so they have lots of time to invest their pocket money and watch it grow!
Pros:
- Builds financial independence and strong money habits like discipline and delayed gratification
- Benefits from long-term compounding growth, making it easier to save for a house deposit – try our compound growth calculator to see how compounding helps grow your savings quicker.
Cons:
- Requires patience and discipline investing takes time to grow
While this approach doesn’t provide immediate assistance like a guarantor loan or deposit gift, it fosters long-term financial security.
Many parents in Australia are already taking advantage of this method, we currently has around 5,000 families using Kids Investing Accounts to give their children a financial head start for whatever their goals may be.
Which option is right for you?
When looking to help your kids buy a home, each strategy has its own advantages and risks, and the right choice depends on your financial situation and long-term goals. While being a guarantor or gifting money can provide immediate benefits, helping your child develop strong financial habits early can set them up for lifelong success.
If you’re looking for a way to start investing for your child’s future, Stockspot’s Kids Investing Accounts offer a simple and effective way to build wealth over time.
