Helping adult children get on the property ladder by going guarantor is a “real no-no”, a wealth management firm has warned.
Speaking in Sydney recently, HLB Mann Judd’s wealth management partner Jonathan Philpot told journalists that a key theme for 2018 is “making smarter financial decisions”. He highlighted prudential lending to children as one of the main aspects of this.
He said that one of the main things to remember is “definitely don’t act as guarantor for the loan, or put your own home on the line as security”.
Explaining that he’s having more conversations with parents eager to help their kids out as the property market grows in price, Mr Philpot said that gifting funds — while apparently the easiest option — is also a risky move.
“Often I hear people saying, ‘We’ll give our child $50,000 [to] $100,000 to help them get in [to the market]’ and they simply want to gift it to them,” the wealth management partner began.
“[However], when I start talking through that with them, and find out a little bit more about where the child is... is the child in a relationship, are they single… how stable is the relationship?
“[For the parents], it often comes down to ‘I would actually like to protect this money that I’m giving to my child a little bit more’.”
He said that one way to do this was to write up a formal loan document. The agreement doesn’t need to have an interest component to it; rather, it’s a safeguard against potential relationship breakdowns.
“[It’s] just a signed loan agreement saying, yes, we’ve given our child $50,000 there. It’s in place so that if anything was to go sour in the relationship, then obviously the child’s not having to give half of it to their ex-partner.”
Mr Philpot called this the “smarter way of doing it”.
Continuing, the expert acknowledged that while parents may feel emotionally obliged to go guarantor on the child’s loan, he “strongly” discourages them from doing so.
Parents may also be approached to become guarantors for business loans. Again, he said that is a “real no-no”.
“If the banks don’t feel comfortable giving them loans, I try to encourage the parent not to,” Mr Philpot said.
“Obviously, you want to see some runs one the board, and that they [the children] are able to support loans and everything. [There] is a point in time where it does make sense to be helping out the children getting into the market, but it’s how you do it that can be improved often.”
According to recently released Westpac research, 6 per cent of Baby Boomer parents have agreed to be a guarantor for their children’s home loans, 10 per cent loaned and 12 per cent gifted.
One-quarter of Baby Boomers liked the idea of going guarantor in the future, while 41 per cent were willing to gift money and 35 per cent were willing to loan the money.