I have seen situations where property retained in the parent's name for the children to buy down the track creates a trap, effectively boxing children into an arrangement they don’t feel they can change – Mark Withers

What form should assistance take when helping your children into a property? Will you buy the property outright and own it yourself, giving the children the right to live in it now and buy it later?

Will you enter into a shared ownership arrangement with the child? Will you just give them the money? Or will you simply be the bank and lend them some or all of the money required, and if so, what will the terms of the loan be and will you get security for your money?

There is no right or wrong answer to this but having observed many different approaches with many different outcomes I have personally come to favour the “be the bank” option – leaving the kids to own the property outright.

Why? Here are some of my observations. If you own the property outright and allow the kids to live in it, how realistic is it that they will ever be able to buy it from you? Will they be expected to pay market value for the property or will they get to buy at cost? If they get to buy at cost how do you make this fair to other siblings? Will they be expected to pay rent and if so how will it be set?

Forced Arrangement

I have seen situations where property retained in the parent's name for the children to buy down the track creates a trap, effectively boxing children into an arrangement they don’t feel they can change.

Despite the decision being taken with all the best intentions children can become resentful of this. Joint ownership seems a good bet at first glance but can also be problematic: you pay cash for your portion of the property and the child borrows for theirs.

The difficulty with this, though, is that the bank with the first mortgage will insist you guarantee the child’s debt, effectively making the mortgage responsibility yours if the child can’t service it. The bank will also require all your financial information and statement of position and make you jump through all the hoops you would have to if you were the actual borrower. This is the case even if you offer to guarantee the child’s mortgage without being an owner of the property. Simply lending the money the child needs can work best for the following reasons:

1. They get to choose their own property. One of life’s great thrills, your job is to guide them on sensible due diligence initiatives, not to choose the house for them.

2. Your child is incentivised to improve the property. If they are on the title alone and get to keep the rewards of their work and some capital growth they will have the best incentive in the world to climb the ladder. For many children, the realisation of a capital gain on a first property lights a lifelong fire to build more wealth.

3. Your child is entitled to a primary residence exemption from the new two-year taxing rules.

4. You don’t have to guarantee the child’s mortgage; you aren’t the owner so can stand distinct from this. This has the added benefit of forcing the child to handle the burden of the bank debt.

5. You determine the terms for the loan. At a minimum it should be acknowledged formally with a deed of acknowledgement of debt. This is critical as a gifted sum can be lost if the child’s relationship fails but a loan can simply be recalled and will not be subject to matrimonial claims. It may even be possible to secure your advance with a second mortgage ranking behind the first mortgage lender, subject to gaining consent from the first mortgagee. Having this security registered on the title also makes it more difficult for the child to independently borrow more money against the property without first refinancing your loan. Consider also the terms of the loan - what if any interest will be payable and what rights will you have to call up the loan?