I often hear parents lamenting about how their children will never be able to afford to buy a house. There are some ways you can help them get a foot on the property ownership ladder. This article goes through the pros and cons of some of these options.
The article is courtesy of ANZ (one of the lenders on our extensive panel) and you can read the full article at https://www.anz.com.au/private-bank/insights/planning/helping-your-children-buy-a-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.
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.
Many 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. Come and speak to Catherine at Volare Home Loans and she can assess your their borrowing capacity,
A good starting point for parents is to see a financial advisor to determine how much to provide. Parents, before helping their children, have achieved their own financial goals such as:
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:
Often the simplest option is to gift money. Give the child an amount – enough for a deposit or substantially more – where there are no strings attached,
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.
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. But 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.
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 risk with this option 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.
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.
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 is generally not popular. If you do this, the child won’t be able to get any first-home-owner grants. 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.
Refer to the infographic from ANZ Private Bank below to consider ways you can assist your children in buying their first home.
If you have any questions or would like to discuss this any further please call Catherine on 0411 849 804.
Message from CAtherine
Occasionally I come across an interesting article to do with Home Loans. I thought I'd share some of these with you here.