How Parents Can Help (and What to Consider)
The dream of owning a home feels increasingly out of reach for many young Australians.
As a parent, you might be wondering how you can help your kids get a foot on the property ladder.
There are several ways to lend a hand, each with its own set of advantages and disadvantages.
Let’s break down some common approaches:
1. The Gifted Deposit: a generous head start
One of the simplest and most direct ways to help is by gifting your child a sum of money to go towards their deposit.
Pros:
- Reduces the burden: A larger deposit means your child needs to borrow less, potentially leading to smaller mortgage repayments.
- Avoids LMI: A bigger deposit can also help your child avoid paying Lender’s Mortgage Insurance (LMI), a significant expense.
- Straightforward: It’s a clean transaction with no expectation of repayment.
Cons:
- Impact on your finances: This is a gift, meaning the money is gone. Make sure you can comfortably afford it without jeopardising your own financial security.
- Potential for complications: Lenders usually require a letter confirming the money is a gift and not a loan. If either you or your child receives a pension or other similar support, the making or receiving of a gift could impact eligibility.
- No formal agreement: There are no formal agreements in place when money is gifted.
2. Family Pledge Loan (Guarantor Loan): using your equity
This involves using the equity in your own home as security for your child’s home loan.
Pros:
- Reduced deposit: This helps your child avoid needing a large deposit.
- Avoids LMI: Can bypass the need for LMI.
- Faster entry: This can enable your child to enter the property market sooner.
Cons:
- Significant risk for you: If your child defaults on the loan, you are liable for the debt and could lose your own assets, including your home.
- Impact on your borrowing power: Guaranteeing a loan may affect your ability to borrow or secure loans for other purposes.
3. Co-Buying: sharing the load
You and your child purchase the property together, sharing ownership and financial responsibilities.
Pros:
- Increased borrowing capacity: Combining incomes and assets can increase the amount you can borrow together.
- Shared responsibility: Both parties share the financial burden and asset ownership.
- Shared expenses: You can share property expenses.
- Security for the younger buyer: Provides a sense of security for the younger buyer.
Cons:
- Complexity: These arrangements can be complex and carry potential tax consequences.
- Agreement needed: You’ll need a clear agreement about how issues will be dealt with, such as unexpected expenses or if one party wants to sell.
- Missed benefits: Consideration should be given to any benefits that the children will miss out on due to the joint enterprise, such as benefits only available when all purchasers are first home buyers.
4. Loaning Money: a structured approach
Instead of a gift, you loan money to your child, with or without interest.
Pros:
- Control over funds: You retain some control over the funds.
- Structured repayment: You can formalise the loan with written agreements, clarifying repayment terms.
- Less risk to your finances: A carefully drafted loan agreement, including a structured repayment schedule, can be a way for parents to help with less risk to their own financial security.
Cons:
- Potential for conflict: Loans between families can be a source of relationship conflict, especially if the loan is not repaid on time.
- Documentation is key: Make sure to formalise the loan with written agreements, clarify repayment terms, and ensure there is an understanding of when and how the loan will be repaid.
- Tax implications: There can be tax implications, including potentially treating the loan as a deemed, unfranked dividend under Division 7A issues.
5. Other ways to help:
- Covering additional costs: Help with stamp duty, legal fees, and moving expenses.
- Housing your child while they save: Allow them to live at home rent-free or at a reduced rent.
- Providing guidance and advice: Share your experience and knowledge about property buying.
- Encouraging the First Home Super Saver Scheme (FHSSS): This government initiative allows first-home buyers to save for a deposit through their superannuation, providing tax benefits.
The bottom line:
Helping your children enter the property market can be incredibly rewarding.
Each of these options has its merits and drawbacks, and the best choice will vary based on your personal circumstances and financial flexibility.
It’s crucial to consider how each method impacts not just your child’s immediate financial situation but also your long-term financial health and familial harmony.
Careful planning and open family discussions are key in navigating these decisions.
