Helping children buy a home is a goal for many parents who want to give their kids a strong financial foundation. This generous act does, however, require careful planning to ensure that both the parents and the children are financially protected. In Australia, the so-called “Bank of Mum and Dad” has become one of the country’s biggest lenders, with as many as 60% of first-home buyers in recent years receiving parental assistance and nearly $100,000 provided on average. These figures highlight how common parental help has become – and why it’s so important to do it right. Below, we explore the key strategies, risks, and considerations parents should weigh when assisting their children in purchasing property.
Ways parents can help
There are several ways parents can assist their children in entering the property market:
- Providing a cash gift – The simplest form of assistance is gifting money for a home deposit. However, this approach carries risks. For one, many lenders will require a signed letter confirming that the funds are a genuine gift, with no obligation for your child to repay you. Banks do this to ensure the buyer isn’t taking on hidden debt. Additionally, once you gift the money, it becomes your child’s asset – which means if they’re married or in a de facto relationship, that money could be counted as a joint asset in any future separation or divorce.
- Offering a loan instead of a gift – Structuring financial support as a loan rather than a gift can protect the money if the child’s relationship ends. With a formal intra-family loan, the money remains legally part of the parents’ estate and is expected to be repaid under agreed conditions rather than being viewed as the child’s money. Documentation, clarity, and legal assistance are crucial in drafting a successful written loan agreement.
- Acting as a guarantor – Parents may choose to use the equity in their home to guarantee part of their child’s mortgage, helping them secure a loan without paying Lender’s Mortgage Insurance (LMI). For example, rather than the child needing a 20% deposit, the bank might accept a 5% deposit if the parents guarantee the remaining 15% of the loan. This can save the child in question tens of thousands in LMI fees and get them into a home faster. However, this also carries risks, as parents become liable if their child defaults on repayments. It’s wise for both parent and child to seek independent legal advice before signing any guarantor documents.
- Utilising the First Home Super Saver Scheme (FHSSS) – Parents can also help indirectly by encouraging their children to contribute pre-tax income into the FHSSS, allowing them to later withdraw these savings for a home deposit with tax benefits. The FHSSS lets individuals withdraw up to $50,000 of these voluntary contributions in total (up to $15,000 of contributions per year), and a couple buying together could potentially withdraw up to $100,000 combined. The benefit is that the money saved is taxed at only 15% on the way in, which is usually lower than the child’s income tax rate, so they can save faster than in a normal bank account. However, it should be noted that the FHSSS is just a mechanism to save efficiently – it doesn’t involve the parent’s money directly (unless the money put into the super is gifted by the parents).
- Co-buying property – Some parents choose to purchase a property jointly with their children. Joint ownership means both parties’ incomes and assets are considered by the bank, which can greatly improve the chances of loan approval and often allows for a more expensive property than the child could afford alone. It also spreads the burden of the deposit, stamp duty, and monthly repayments between parent and child. While this can help with serviceability and financing, it requires clear legal agreements to outline each party’s obligations.
- Leveraging government schemes (WA): If you’re in Western Australia, there are government incentives for first-home buyers that can complement your help. These can reduce the amount of parental assistance needed; for instance, WA’s First Homeowner Grant (FHOG) offers a one-off $10,000 payment to eligible first-time buyers who purchase or build a new home (it doesn’t apply to buying established homes). The child can use this grant toward their deposit or other purchase costs, and importantly it does not have to be repaid. By combining government assistance with parental support, the chance is offered to significantly boost a child’s ability to purchase a home while easing the financial load on both the parent and the child.
Protecting financial contributions in case of relationship breakdown
Formal agreements and legal documentation can safeguard a parent’s financial contribution if a couple’s relationship deteriorates. A major concern for many parents is ensuring that their financial assistance does not become part of a settlement if their child separates from a partner. The best way to safeguard contributions is to:
- Structure assistance as a loan – A formal loan agreement is one of the best ways to protect a parent’s contribution as it ensures that the money is repaid in case of separation as without a loan agreement courts are much more likely to treat the parents’ contribution as a gift.
- Implement estate planning measures – Equalisation clauses in wills can ensure fairness if parents have helped one child but not another. For example, if parents give $100,000 to their daughter for a house, an equalisation clause might stipulate that their son will receive $100,000 more from their estate than the daughter does, so both ultimately get an equal total benefit. These intentions should be clearly recorded in a will or deed of loan.
- Seek legal advice – Whenever dealing with significant sums of money and family relationships, getting proper legal advice is invaluable. Consulting a lawyer to draft appropriate documentation ensures that financial contributions remain protected.
What children need to consider when accepting parental assistance
Children receiving financial help from their parents should be aware of several key factors:
- Financial responsibility – Even with parental assistance, they must ensure they can afford ongoing mortgage repayments and property maintenance costs. Taking parental money should not be seen as a free pass to buy a home beyond one’s means; it should be a stepping stone that still requires the child’s commitment and financial discipline.
- Bank loan requirements – Many banks require written confirmation of whether parental contributions are a gift or a loan, which can affect mortgage approval. If it’s a gift, the bank may ask for a signed gift letter stating the money is non-refundable and that no repayments are expected (as noted earlier). This assures the bank that the borrower won’t have an unrecorded debt (which could affect their ability to pay the mortgage). If it’s structured as a loan, the bank will factor that into the child’s liabilities and assess whether the child can afford to repay both the mortgage and the loan. However, the child should also make sure they have saved a genuine portion of the deposit themselves as proof that they can manage money.
- Long-term expectations – If the assistance is a loan, they should be clear on repayment terms and any potential impact on their parents’ financial situation. Communication between parent and child is absolutely crucial in these arrangements.
Final thoughts
Helping children buy a home can be a fantastic way to give them a financial head start, but it needs to be done with careful consideration and planning. By structuring assistance properly, seeking legal and financial advice, and ensuring parents’ own financial security remains intact, families can successfully navigate this significant financial decision. With the right precautions, the bank of mum and dad can open doors for children without causing headaches for the parents.
If you are considering assisting your children with a home purchase, speak to your HPH financial adviser to explore the best strategies for your specific circumstances.