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How to help open doors to your children's financial future

Wanting to help your children get a foot in the property market is a common financial objective amongst our clients at Hewison Private Wealth, and it’s an admirable one.

Parents will have varying reasons for wanting to assist their children, it might be because your children simply haven’t saved enough for a deposit, or they might need a top up to avoid paying the dreaded lender’s mortgage insurance (LMI). Or, you may simply have the means and desire to help keep your children’s mortgage at a manageable level.

Firstly, it’s important to consider the real purpose of the loan, is it in place for asset protection purposes, or do you have a serious expectation of being repaid? Effectively this would be an early inheritance, which if you can afford, makes sense and will allow you to financially assist your children when they really need it, rather than later in life.

There are a number of approaches to consider when looking to help your children, including:

  • Family trust: using the family trust you can loan funds to your children at an interest rate of your choosing (this could be zero).
  • Self managed super: be aware that if you operate a self-managed super fund it cannot make related party loans, therefore, lending money to your kids from super is not an option. That said, if you have met a condition of release and are able to draw money from super, you could then establish a loan arrangement.
  • Act as guarantor: If you have sufficient security in your own home, you may wish to offer it up as security for your child’s bank loan, this may erase the need for them to have a deposit. However, you should carefully consider your child’s ability to service the loan, because if they fail to do so the bank will come knocking on your door, not theirs.
  • Co-investing: You may also consider co-investing as tenants in common with your child in the property purchase, with the ability for your child to pay you out in the future.

However, as with most financial decisions there are risks you should consider. When gifting to your children, you need to be comfortable that while the money is initially to assist with a property purchase, the money becomes theirs to spend as they wish in the future, unless you have a carefully crafted loan agreement in place. Like all things of a legal nature, I recommend consulting your solicitor to have any loan agreements professionally drawn up.

In most cases your child will still have a mortgage to repay, and if they become unable to make repayments, they risk losing their home along with your contribution. One method to mitigate this risk is income protection insurance, if your child becomes ill or injured and are unable to work, income protection should continue paying up to 75% of their salary, meaning mortgage repayments can still be made.

Finally, assisting your children financially is a fantastic and incredibly generous way to help them invest in property. My parents did it for me. My advice is to ensure you’ve considered all the risks associated and are comfortable with the path you choose. 

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.au

Please note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.