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Helping your children buy a home

 

December 2016

 

 

 

 

 

Zoe Fielding explains what to consider and ways you can assist children in buying their first home.

“A lot of young professional couples have the repayment capacity but not the saving capacity to buy their first home,” says Queensland University of Technology Professor in property economics Chris Eves. “If parents can help them get the deposit they may be able to move into a purchase decision.”

Parents who have the financial means often find satisfaction in transferring wealth to their children during their own lifetime by helping them to buy a home.

Those with property experience can play a useful role in guiding their children toward home ownership and helping them determine what is affordable, Eves says. But he advocates leaving the choice of property to the child.

“[Generally] the decision has to be the child’s for there to be some level of ownership – parents should realise they’re not living in the property so it should be the child’s taste not theirs,” he says.

ANZ Private senior financial advisor Jacki Tulloch says the level of input parents have into the purchase decision usually depends on how much they contribute financially. Some offer a deposit before stepping back. Others provide significantly more and have a greater say.

Tulloch says wealthy parents helping their children to buy usually favour properties they consider to have the potential for long-term capital gain. Most prefer freestanding houses or townhouses with land, typically within 10 kilometres to 15 kilometres of the city, or located close to family.

 

Before you help

Even with financial assistance, most young people buying a home need to take out a mortgage. In this case, they should first speak to a lender to assess their borrowing capacity, Tulloch says.

A good starting point for parents is to see a financial advisor to determine how much to provide. Most wealthy parents, before helping their children, have achieved their own financial goals such as:

  • paid off their mortgage
  • become financially independent
  • own a holiday home outright.

At a minimum, parents should generally make sure they have enough rainy day money and are financially comfortable before helping children, Tulloch suggests.

Parents with more than one child may need to consider whether they will be able to provide similar assistance to each of their children.

The next step is to decide how to provide the funds. Financial, legal and tax advisors can help determine the best approach, addressing questions such as:

  • What will the tax implications be?
  • What if the child’s marriage or relationship breaks down?
  • What if the child becomes ill or loses their job?
  • What if the child’s business fails?

“[In answering these questions] we get to see what [the situation] may look like in 10, 15 or 20 years’ time. Most people think about now and maybe in five years’ time, not the complexities that can come out if it in future,” Tulloch says.

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A simple gift

The simplest option, says Tulloch, is often to gift money.

“[Parents] give the child an amount – enough for a deposit or substantially more – where there are no strings attached,” she says. “The advantage is that it’s clear on both sides: the money is the child’s to be used towards purchasing a home.”

There are generally 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.)

The biggest drawback is that parents have no right to reclaim the money at a later date. This may lead to regrets if the child’s marriage or relationship breaks down, as the child’s partner may be entitled to half of the assets, including the gifted sum.

Similarly, if the child has a business that fails, creditors may be entitled to those funds.

“If you just give money, it generally doesn’t offer either party protection,” Tulloch says.

 

Loans

Lending to children can achieve a similar outcome to gifting but with greater protection, says Brennan Solicitors’ Paul Brennan.

By structuring financial assistance as a loan – even if the parents do not intend to ask the child to repay the debt – the parents have the option to recall the money.

Reclaiming the money would allow the parents to return it to their child later on, after the reason for recalling it has been resolved. A loan can be forgiven on the parents’ death.

Establishing a loan is more costly than gifting money.

“You generally should have it documented,” says Brennan. “An undocumented loan is a difficult thing because it’s almost impossible to get the money back.”

It may also be important to have the loan secured by an asset to help ensure funds can be made available to repay the loan if required, Brennan says.

“…parents should realise they’re not living in the property so it should be the child’s taste not theirs.”
Chris Eves, QUT

Going guarantor

Another way parents can help is to guarantee the child’s mortgage. This allows parents to provide assistance without giving cash up front by using their own income or the equity in their property to secure the child’s loan.

A guarantee may allow the child to borrow more than they otherwise could. It may also allow the child to avoid having to pay lenders’ mortgage insurance, which can add tens of thousands of dollars to the purchase cost.

If the home rises in value, the child may be able to refinance so the parents are no longer providing security.

“The problem with [acting as guarantor] is that if the child defaults on the loan, due to losing their job, accident or illness for instance, the parents are left having to repay it,” Tulloch says.

Another risk is that if the child buys the property in joint names with their partner and the relationship fails, the child could lose half the house but the parent would remain guarantor for the full value of the loan.

Parents should also be aware that acting as guarantor affects the amount they can borrow for other purposes as lenders consider guarantees as borrowings when determining how much to lend.

 

Buying together

Some parents buy in partnership with their child with the intention that the child could buy them out at a later date to take full ownership of the property. The property may be owned directly or through a trust.

This may suit some families but Tulloch says it’s generally not popular.

“If you do that, the child won’t be able to get any first-home-owner grants,” she says. “Also, if it’s going to be the child’s own residence, they don’t have to pay any capital gains tax but the parents will have to.”

If the parents are buying in partnership with their child, they should consider buying in joint names or through a family trust so the property would transfer seamlessly to the child on the parents’ death.

 

Use our infographic to consider ways you can assist your children in buying their first home.

 

To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below.


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Helping your children buy a home infographic

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1. NSW Trustee and Guardian, The Superannuation Complaints Tribunal Annual Report 2013/14

2. Source: Australian Taxation Office - www.ato.gov.au/Individuals/Deceased-estates/Being-an-executor/The-deceased-estate/

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