Before you hand over savings or put the family home behind a loan, work out what is actually stopping your kids from buying, and how you can help your kids buy a home the right way.
I speak with a lot of parents who are ready to help their adult kids buy a home. Most arrive with a solution already in mind. They might offer a cash gift, put the family home up as extra security through a guarantee, or sell a family property to one of their kids at a discount.
My first reaction is usually: slow down. Before anyone transfers money or signs anything, I want to know exactly what problem we are trying to solve.
Chelsea and her partner had solid incomes, $40,000 saved and parents willing to offer around $200,000 of equity in the family home. It sounded like a huge advantage.
It added nothing to their borrowing power.
Their income, expenses and existing debts capped the loan at around $720,000. A family guarantee could help with the deposit and Lenders Mortgage Insurance, but it could not make the bank lend more than they could afford to repay.
The actual cash gap on the home they wanted was about $15,000. They did not have a $200,000 problem. They had a $15,000 problem.
| THE THREE PROBLEMS I LOOK FOR
A deposit problem means your kids can afford the repayments but are short on upfront cash. A borrowing-power problem means the bank will not lend them enough based on their income, expenses and debts. A property-price problem means the homes they want are still outside reach even after combining the available loan and deposit. |
The Smallest Fix to Help Your Kids Buy a Home
When I sit down with a family, I run the numbers a few ways: current savings, a smaller cash gift, a limited family guarantee, the Australian Government 5% Deposit Scheme or, where relevant, buying a family property at a genuine discount.
I am looking for the smallest, cleanest way to help your kids buy a home without creating a problem for the parents later.
Sometimes the parents do not need to contribute anything. Chloe worked part-time at a hospital and served as an Army Reservist. An unused credit card with a $5,000 limit was reducing her household’s estimated borrowing power by about $20,000.
Reducing the card limit dealt with the borrowing-power problem. A guarantee would only have dealt with the deposit and LMI. That is why I check the simple things before I ask a family to put money or property on the line.
Option 1: A Cash Gift Can Be the Cleanest Lending Structure
Many parents I speak with feel more comfortable making a manageable cash gift than tying their home to a family guarantee. From the lending side, it can be cleaner: the amount is known, their kids’ home loan is simpler and the parents’ home stays outside the structure. Whether giving that money is right for the parents is a separate financial decision.
That last point matters. With a family guarantee, the lender formally ties the parents’ property to their kids’ home loan, usually by taking it as additional security and registering a mortgage where required. It’s not just a promise. The property stays tied in until the lender releases it.
A genuine gift does not need to be repaid. The lender will commonly ask for a signed gift letter and evidence that the money has been transferred. If repayment is expected, it’s a family loan and must be disclosed. That ongoing commitment can reduce your kids’ borrowing power.
A gift still needs thought. Parents should consider retirement savings, fairness between siblings, estate planning and Centrelink. Services Australia calls the relevant limits the gifting free area. Parents can give more than the free area, but the excess may continue to be assessed for five years.
Option 2: A Family Guarantee Can Work, but It Ties Up the Parents’ Home
I do not think family guarantees are bad. They can work very well when your kids can afford the loan, the deposit is the only issue, the parents do not have spare cash to gift and they expect to keep their home for years.
A family guarantee does not transfer the parents’ house or equity to their kids. The parents keep ownership, but the lender uses a limited slice of their equity as extra security. This can help your kids buy with little cash and may avoid Lenders Mortgage Insurance. It does not usually increase borrowing power.
Where I become cautious is when the parents may sell, downsize or refinance soon. The lender must release or replace the security before that sale or refinance can proceed. If their kids’ loan hasn’t reduced enough, or the property hasn’t built enough equity, the family may need cash, another property or a different loan structure.
Where a family could use either a manageable gift or a guarantee, the gift can be the simpler lending structure. The parents’ home stays separate, and there’s no guarantee to unwind if they later want to sell, refinance or downsize. That does not make a gift automatically right for the parents. It only explains why some families prefer it from the home-loan side.
Where a guarantee is used, I generally explore a limited amount rather than the whole debt. Our guarantor home loan guide explains the structure, while our guide to removing a guarantor covers how the parents may later be released.
The risk is real. If your kids cannot repay the loan, the parents may have to pay the guaranteed amount. If they cannot pay, the lender may be able to sell the property used as security. Moneysmart’s guarantor guidance is worth reading. Parents should also obtain independent legal advice before signing.
Before putting the family home behind a loan, I check whether the government scheme already solves the deposit problem. Eligible first-home buyers may buy with a 5% deposit and no LMI, while eligible single parents and legal guardians may qualify with 2%. Price caps and normal lender approval still apply.
Option 3: Gifted Equity Through a Family Property Sale
Gifted equity is different from a family guarantee. The parents are actually selling a property to one of their kids below market value, and the difference between the independent valuation and the family sale price may be accepted as the kids’ contribution, subject to lender policy.
In one family I helped, a daughter bought her mother’s property for around $900,000 after it was valued at approximately $1.3 million. The price difference formed a substantial contribution and helped her avoid about $14,000 in LMI. Her mother did not need to transfer a large cash gift or put another property behind the loan.
On the lending side, this can be very effective, but it can create tax and legal issues. Stamp duty may be based on market value, and the ATO’s market value substitution rules may treat the parent as though they received market value for capital gains tax purposes. Centrelink, estate planning and family-law issues may also apply. Get an independent valuation, a proper contract, legal advice and tax advice first.
How I Compare the Options
- Use a cash gift: may suit the lending structure when your kids only need a manageable amount, and the parents can provide it without compromising their own plans. The parents’ home stays separate from the loan.
- Use a limited guarantee: may suit when your kids can service the loan, the deposit is the problem, the parents do not want or cannot provide a cash gift, and they are not planning to sell their property soon.
- Use the 5% Deposit Scheme: may suit when your kids are eligible, and it removes the need for parental security altogether.
- Consider gifted equity: may suit when a family property is genuinely available for sale and the legal, tax, duty and Centrelink consequences have been checked first.
Parents can also buy jointly with their kids, but that creates a different set of ownership, tax and exit questions. Our guide to buying a house with your parents explains why co-ownership needs its own plan.
Five Checks Before Anyone Commits
- Have a mortgage broker compare your kids’ borrowing power and the available family-help options before any application is lodged.
- Calculate the full amount your kids will need, including duty, legal fees, inspections and a buffer after settlement.
- Write down whether any money is a gift, a loan or part of a property transfer.
- Check what the arrangement means for your retirement, future borrowing, Centrelink position, your other kids and estate plan.
- Get separate legal and tax advice where a guarantee, property transfer or joint ownership is involved.
Frequently Asked Questions: Help Your Kids Buy a Home
What’s the difference between a cash gift and a family guarantee?
A cash gift is money handed over that doesn’t need to be repaid, and it keeps the parents’ home outside the loan structure. A family guarantee ties a portion of the parents’ property to their kids’ loan as extra security, and the property stays tied in until the lender releases it.
Does a family guarantee increase how much my kids can borrow?
No. A family guarantee can help with the deposit and avoiding Lenders Mortgage Insurance, but it doesn’t increase borrowing power. Borrowing power is capped by the kids’ income, expenses and existing debts.
What is the Australian Government 5% Deposit Scheme?
It allows eligible first home buyers to buy with a 5% deposit and no Lenders Mortgage Insurance. Eligible single parents and legal guardians may qualify with a 2% deposit. Price caps and normal lender approval still apply.
What is gifted equity when buying a family property?
Gifted equity is when parents sell a property to one of their kids below market value. The difference between the independent valuation and the sale price may be accepted as the kids’ contribution, subject to lender policy. It can trigger stamp duty and capital gains tax considerations, so legal and tax advice is essential first.
What happens if my kids can’t repay a loan I’ve guaranteed?
The parents may have to pay the guaranteed amount. If they can’t pay, the lender may be able to sell the property used as security.
How much can parents gift without affecting Centrelink?
Services Australia sets a gifting free area. Parents can give more than this amount, but the excess may continue to be assessed for five years.
| THE ONE THING I WOULD RECOMMEND
Do not start with how much you can offer. Start with the exact problem your kids need solved. Sometimes a $15,000 gift does the job a $200,000 guarantee cannot. Sometimes the answer is reducing a credit card. Sometimes the government scheme means you do not need to put your home on the line at all. |
Get the Numbers Clear Before You Offer Help
At Hunter Galloway, we’re Brisbane-based mortgage brokers helping families across Australia. We compare options across more than 30 lenders and model your kids’ position side by side, whether they are buying with their current savings, using a cash gift, setting up a limited family guarantee, applying through the Australian Government 5% Deposit Scheme or purchasing a family property at a discount.
My job is to show you the smartest way to help your kids buy a home, what you would be putting at risk and whether a smaller, simpler option gets the same result.
For standard residential home loans, there are no fees for our service. We are usually paid by the lender if the loan settles, and that payment is disclosed in writing.
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About the Author
Jayden Vecchio, Mortgage Broker at Hunter Galloway
Jayden Vecchio is a Brisbane-based mortgage broker at Hunter Galloway, helping clients across Australia. He was named FBAA Broker of the Year 2017 in both the National and Commercial categories. He specialises in first-home buyer loans, refinancing, investment, self-employed, commercial and construction lending. Jayden holds a Bachelor of Business, a Certificate IV in Finance and Mortgage Broking and a Diploma of Financial Planning.
Phone: 0481 615 063 | Email: ja************@****************om.au | huntergalloway.com.au
Jayden Vecchio is Credit Representative 476903 of Connective Credit Services Pty Ltd, Australian Credit Licence 389328.
