A helping hand
For parents of first-time buyers, it’s difficult to sit by and watch children face these frustrations.
Unsurprisingly, many parents are looking to help their children into the property market by offering cash for a house deposit, a loan, or other financial assistance.
ANZ Private senior financial adviser Rebecca Hurford says parents have a variety of motivations when investing money for children’s future home purchases.
“Ultimately, it’s about peace of mind,” she says. “Parents feel good for doing a good deed and they feel like they’re setting their children up for future success.”
Providing financial assistance with a house deposit is arguably the best way to invest money for your child. Australia has a tax system that favours home ownership as a pathway to wealth creation as capital gains made when you sell your primary residence are tax free. And while property prices don’t always rise, a vast number of people in Australia have built wealth on the increasing value of their home.
ANZ economists are forecasting home prices across Australia’s capital cities will rise by 17% in 2021 and by 6% in 2022.
With price gains expected, the sooner your child can get into the housing market the better. Waiting longer might mean they have to take out a larger mortgage, which will take longer to repay and cost more in interest.
Parents who provide a gift or loan can help shortcut the time it takes their child to accumulate a 20% home loan deposit – the amount needed to avoid having to pay thousands of dollars for lenders’ mortgage insurance.
“The financial comfort for the child puts them in a better position with less stress on their finances,” Hurford says.
Even with financial assistance, most young people buying a home need to take out a mortgage. And this can be a beneficial experience.
“It can teach them how to prioritise between necessary expenses and luxuries that they can do without,” Hurford says. “It does give more discipline with finances and maintaining a budget.”
Plus, owning a home brings a sense of accomplishment and security that’s hard to match.
All parents can support their children who are buying property by helping them to navigate the buying process and seek advice from mortgage brokers and financial advisers where appropriate.
Some parents have been investing money for children’s future needs for years. Others are looking to help by drawing on savings, tapping into their own home equity, or acting as guarantor to their child’s loan.
“Their priority is helping the kids, but quite often parents don’t think about risks to themselves,” Hurford says.
Before rushing in to help your kids, consider your own situation.
“Can you afford it today and in the future? If that’s a chunk that comes out of your nest egg, it could put a dent on your own retirement plans,” Hurford says.
Giving or lending money to a child can have implications for age pension entitlements that you need to understand if you are approaching retirement or may need to access Centrelink payments in future.
Parents with more than one child should also be mindful of sibling rivalry.
“If you are helping one child and there are other children you should be able to do the same thing to treat children fairly. If there are four kids, can you afford it times four? That could have a big impact on the parents’ financial wellbeing,” Hurford says.
“Sit down with someone who can see what your situation is now, consider your future goals, income needs over time, and level of assets. Doing an analysis and detailed number crunching on your future situation will determine whether you can or can’t afford it,” Hurford says.
Parents may also need to update their wills to recognise the assistance they have given to ensure all of their children are treated equally.
Claw back clause
Getting the money back is usually the furthest thing from your mind when you decide to help your child to buy their first home. But Brennans Solicitors lawyer Paul Brennan says having some form of asset protection in place should be a top consideration when you think about the way in which you will provide assistance.
Brennan has numerous horror stories of parents who did their very best to invest for their children’s future, only to see later complications arise as a result of the child’s marriage breakdown, bankruptcy, ill health or poor life choices.
“You want your children to succeed, but you have got to be the sensible one, being the parent,” Brennan says.
Giving money outright for a home loan deposit may be the simplest way in which parents can offer financial support. There are usually few tax consequences for either parent or child with a gifted sum and there may be no legal structures to establish. Parents should seek professional advice to confirm the implications of a simple gift.
But once the cash is handed over you can’t get it back, Brennan warns.
If the child’s relationship breaks down, the former partner could end up with all or some of the money intended for the child. If the child become bankrupt, the parents’ gift will be lost to creditors.
Own it, loan it
In general, Brennan advises against gifting money. Instead, he suggests parents retain ownership of the money, at least on paper, and “give” to their children via a legally documented loan.
“You don’t have to charge any interest, but it’s not a bad thing to have documented in the loan that you can charge interest,” he says.
With interest rates near zero, Hurford says some parents are pursuing a win-win strategy in which they lend money to help out their children and earn a better interest rate than they can with cash savings.
“They are lending money to their children and charging them 1%, which is better for the children than borrowing from the bank and better for the parents than having their cash in a savings account,” she explains.
Whether you charge interest or not, the terms and conditions of the loan, such as its duration, amount and any conditions on the way the funds should be spent, should be documented. This way, everyone knows where they stand and what the expectations are.
Parents can forgive the debt on their death. To do this, they would need to work with a lawyer to include their wishes in their will.
Legally documenting a loan can be expensive but if something goes wrong, it can come back to bite you, Brennan warns. “Paying the money to have a lawyer document it correctly is the smart thing to do ” he says.
ANZ Private senior financial advisor Jacki Tulloch suggests parents should encourage their child to put in place an estate plan and take out adequate insurance cover, with income protection and trauma insurance being the most important to consider.
“If you have loaned them the money you have an interest in making sure they’ve got their finances in order,” Tulloch says.
Another approach that may suit some families is for parents to buy in partnership with their child. The intention is usually that the child would buy out the parents at a later date to take full ownership of the property. The property may be owned directly or through a trust.
Buying in partnership prevents the child accessing first-home-owner grants and the parents may be required to pay capital gains tax when the property is sold, so this option is less popular.
As with a loan, Brennan says parents should insist on having documentary evidence of the arrangement.
“The good news is that when one party wants to sell, the property gets sold so there’s a chance to get your money back. The downside is if they don’t wish to sell you’d have to go down the path of legal action” he says.
Rather than putting up cash, parents may consider helping by becoming a guarantor or cosignatory to the child’s loan. This may allow the child to borrow more than they otherwise could and may result in lower interest rates for the child.
But acting as guarantor can have significant consequences for the parents.
“From a finance point of view, it does affect your own borrowing capacity, and if your children default on the loan you become responsible for paying the debt,” Brennan says.
“If the children default and there’s insufficient proceeds to clear the debt the lender can come back to the parents so they have got to either find the cash to pay it or their own property could be put at risk," Hurford says.
“Unfortunately, I have seen it happen,” she adds.
One client did not seek advice but came to Hurford after they had become guarantors for their son’s home loan. The son and his wife had a nasty divorce and the son could not settle his debts. As guarantors for the mortgage, the parents were responsible.
“The parents had to cash in their super to clear the debt,” Hurford says.
Gifted equity can carry similar risks. Your own home might seem like a massive store of funds just waiting to be tapped, but using your equity to help your child to become a first home owner puts your home at risk if the child cannot meet their repayments.
As a rule of thumb, Hurford says parents should avoid acting as a guarantor for their children, and always seek legal and financial advice before acting.