Debbie Shankar - 31 Oct, 2014

Should I Become a Guarantor for My Child?

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As a parent you are always looking to help your child further themselves and you want to provide them with a sound financial grounding so that they can be successful and get ahead in life. But, as most parent’s know when it comes to purchasing a home and breaking into the property market it can be difficult when you’re young and just starting out.

With property prices continually increasing, many parents are considering their options and how they can assist their child to buy a home. Of course, these options depend on you, your assets and the type of relationship you have with your child. Let’s look at your options now.

Helping Your Child to Buy a Home

Lending Money – You can lend your child money to buy a home. This sounds logical, especially if they’ve found it difficult to save a deposit. But, you have to remember that there are risks associated with this.

In this respect, you can either gift your child the deposit and expect it not to be repaid or you can set-up a legally binding contract where the deposit is repaid. If you elect to take out the 2nd option then you’ll also need to charge interest on the amount your child borrows.

If you’re gifting money, then just be aware that you, by law, cannot dictate how the money is spent. So if your child uses the money for other purposes you have no legal say.

Before making any decision, ask your accountant about any tax regulations and how you can abide by these. If you are considering going down the contract path, consult a lawyer so that you know how the process works and the costs involved.

Buying Property for Your Child – Instead of giving your child money, you can buy an investment property for yourself and then rent this out to your child for an agreed amount. This can be less than market value, which will allow you to negatively gear the property and claim maximum tax benefits, and your child can then save for their own home.

Alternatively, you can set-up a rent-to-buy agreement with your child. However, if you elect to go down this route, then consult a lawyer and accountant before making a decision.

Being a Guarantor – If you cannot help your child financially, then you can always assist them if you have a solid financial background yourself. This is done by guaranteeing a home loan.

Many lenders offer parents a ‘parental guarantee’ or ‘family pledge’ where you can use the equity in your home to help secure a home loan for your child. This can reduce your child’s risk of increasing lender’s mortgage insurance. But, you need to be aware that if your child defaults on home loan repayments that you’ll become financially responsible for the property.

While it’s natural for you to want to help your child, make sure you know the risks and that you are not stretching yourself financially to assist them. If you are not comfortable with any level of assistance, then don’t commit. Instead, look for an alternative option.

Do you want to know more about becoming a guarantor? Then contact eChoice and find the right home loan for YOU today.

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