Would you give a loan to your children?

There has never been a shortage of people calling property unaffordable and it has become common practice to discuss the idea of parents becoming guarantors for their children to assist, particularly where deposits are not sufficient.

Becoming a guarantor leaves the parents with a loan over their home, restricting their potential future borrowing capacity and leaving them at the mercy of their children’s astute repayments.

However, Smartline Personal Mortgage Advisers’ executive director Joe Sirianni is pointing to a potential new solution. Under this loan structure, which differs from a straightforward cash loan or gift to your child, the bank lends up to 90% of the property value, with a separate loan from the parents of 10% to 20% of the home.

It must be a freestanding property that the first home buyer is purchasing, explains Sirianni.

“Many parents are keen to give their children assistance to give them that first leg up on the property ladder, which is admirable, but it is a big commitment,” he said.

“Providing a guarantee can, in the worst case scenario, leave the parents open to losing their home if the child can’t or won’t meet their debt obligations to the bank. Even without the worst happening, being a guarantor can still impact on the parents’ ability to borrow or sell the property.”

He also warned that cash loans and gifts are often not recognised by lenders as a genuine deposit or could be lost if a child and their partner split up.

“The only thing riskier than lending to family is lending to complete strangers, which is what banks do thousands of times a day,” he said.

Sirianni explains this structure effectively gives the child two loans. While the smaller loan is to the parents, the bank still manages the repayments, security and paperwork for the parent’s loan for a deposit. The interest rate charged on the portion of the loan that is from the parents is 50% that of the main loan.

Those giving their children the loan can see the full amount paid out through repayments or as a result of sale or refinancing.

“While some parents may have been very reluctant to provide financial assistance in the past, they should feel far more comfortable knowing they have security over the children's property,” said Sirianni.

“It will no doubt make it easier for children to ask for help, and for parents to be able to say yes, knowing they are protected.”

One such product, from Bluebay Home Loans, is called a Parent Assist Loan. It markets itself as an Australian first.

Interestingly, parents who involve themselves in these loans are also eligible to receive a share of the investment growth on the property.

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