Should parents use loans to help children buy their first homes?

In a recent news release, specialist lender La Trobe Financial addressed how rising median house prices are making it harder for young adults to get onto the property ladder. In many cases, parents feel compelled to help their children afford their first homes.

“Young adults are living at home longer, finding it harder and costlier than ever to get onto the property ladder,” said Cory Bannister, chief lending officer at La Trobe Financial. “With median house prices increasing nationally, and to more than $1 million in Sydney, it is harder than ever to afford a starter home – without the assistance of family.”

There are many ways parents might attempt to go about assisting their children. These include gifting money, providing a guarantee for the child’s loan, purchasing the property in their own name, or allowing the child to live on the property under a reduced rent, etc.  

Bannister recommended parents use loans to help their children purchase their first properties. “This is often the best option for parents, as a loan is more transparent and will tend to give parents greater security against a claim by their children’s future or former partners in the event things go wrong.”

Additionally, parents can stipulate their own terms when drawing up the loan agreement. Parents could, for example, charge interest from when the child first borrows the money. If a child’s relationship with a spouse ends, parents can call up the loan and the loan must be repaid. This may require the house to be sold, which leaves very little to the former spouse’s claims.

Bannister recommended La Trobe Financial’s Parent to Child (P2C) product, which enables parents to assist their children with property purchases without onerous bank guarantees. “[These bank guarantees] place the parents’ assistance and wealth in the grip of lenders during a default,” he said.

The P2C loan formally documents the arrangement, registers the mortgage on the security property, and then independently manages the loan to ensure that it is repaid in accordance with the agreed terms. The loan also protects the parents’ investment without exposing their credit profiles or assets to any risks associated with the child running into difficulty with repayments. Parents can also provide assistance with interest rates as low as 3% per annum.