A Hand-Up

January 3, 2023

Want to help your kids buy property? Here’s how

We should thank Duncan Hughs and the Australian Financial Review for this wonderful article, January 2023 (abridged)… We hope it will be a useful starting point in your planning. The article commences:

These strategies can assist your children without jeopardising your financial future. Blake Mason’s dreams of property ownership would have been “nearly impossible” if his mum, Judy, had not insisted on lending him money to help fund the deposit on his apartment in Sydney.

Rising interest rates, tougher lending conditions and sky-high prices, despite recent falls, had kept pushing up the amount needed for a deposit faster than his capacity to save, says Mason, 37, a marketing director. Blake Mason in his first home, bought with the help of his mother, Judy.

Louie Douvis “Mum had been urging me to buy somewhere for years,” he says.

“But I put travel and a uni degree ahead of homeownership. It got to the point where I told her that she’d need to help me if she wanted me to buy. So she did.” Mason was also able to take advantage of the federal government’s First Home Loan Deposit Scheme, which enables buyers to purchase or build a new home with a deposit of as little as 5 per cent (or 2 per cent for eligible single parents) without the need for lenders’ mortgage insurance.

Otherwise, a typical deposit of 20 per cent is about $148,000 for a median property, according to CoreLogic, which monitors rates.

How you can help your children get into property market

Strategies for helping children get on to the property ladder range from giving the cash or providing a loan to acting as co-guarantor, buying together or using a family trust.

Each has its advantages – and drawbacks – depending on parents’ personal and financial circumstances, as highlighted by the accompanying table.

Andrew Wilson, chief economist for property consultancy My Housing Market, says first home buyer numbers increased by 2.4 per cent in October having fallen by about 7 per cent the previous month. Sales are down about 27 per cent for the first 10 months of this year compared to the same period last year.

Many younger buyers lack confidence in growth prospects or are holding off in the hope prices will continue to fall as rates rise, Wilson adds. “But the other end of the pineapple is the nation’s horrendous rental market, with rising rents and vacancy rates of less than 1 per cent that are expected to be exacerbated by increasing migration and the return of overseas students,” he says.

Kelly Kennedy, a financial adviser for tax and financial consultancy BDO, says the firm is experiencing increasing interest from parents considering financial assistance to help their children into the property market. Kennedy urges parents to consider their options carefully and avoid any actions that could damage their finances, jeopardise their standard of living and make it more difficult to provide additional assistance.

Lend or give the money

A gift of cash can be provided with no obligation of repayment.

In addition, potential creditors can only make a claim against the child and not the parents if there are legal problems.

There are also no tax implications and the child can immediately access the funds.

The advantage for parents in acting as guarantor is that they do not have to use their own cash, says BDO’s Kelly Kennedy. Michael Quelch BDO’s Kennedy warns there are three caveats: the child has to prove to the lender they can service a loan; some lenders do not allow gifts as a deposit; and it might cause Centrelink problems for the donor.

“It also reduces the funds you will have available to fund your own retirement, which parents should consider before deciding on the level of assistance they provide,” Kennedy adds. “Alternatively, you could consider providing cash to your children as a loan,” she says. “You may have no intention for the child to repay the funds, but a loan agreement gives you the option.”

Funds subject to a loan agreement would be considered a liability in family law proceedings and be repayable to the parent in full. “This would safeguard and protect the monies provided to your children if a relationship breaks down,” she says. William Moore, a partner with legal firm Hall & Wilcox, adds: “Putting in place a loan arrangement that requires security and repayments gives better protection. If you don’t loan it, you run the risk of losing it.”

Go guarantor

This involves a parent using the equity in their own home as security for a loan. “It is effectively a promise to the lender that if your child is unable to honour their repayments, you will cover them and raise a portion of the value of your home as security,” Kennedy says.

The advantage for parents is that they do not have to use their own cash and the child may be able to borrow more. But parents need to be aware they are liable for the amount they guarantee, which means they could lose their home if the child gets into financial trouble or defaults, Kelly says.

Recent analysis by Digital Finance Analytics found that many parents who financially helped their children were increasingly in trouble because of rising interest rates and cost-of-living expenses.

More than half of the Bank of Mum and Dad borrowers are under financial stress (meaning spending exceeds income), compared with about 28 per cent of property buyers who relied on their own resources, its analysis found.

Buy a property together

Some parents buy a property with their child as “tenants-in-common”, resulting in individual shares of ownership, which effectively means the parent is purchasing an investment property.

“It can be done in anticipation of your child buying you out in the future, or with a view to selling the property and sharing the proceeds,” says Kennedy. Lawyers warn both parties are liable for the full amount of the loan, which could become tricky for the parent if the child cannot maintain repayments.

Also, the parents could be liable for capital gains tax in the year of sale. “The child will be able to use the main residence exemption for capital gains tax for their share of the property if it is their principal place of residence,” adds Kelly.

The percentage of those aged 25-29 remaining at home has increased from about 10 per cent in 1981 to more than 17 per cent due to rising property prices and time spent in higher education, according to the Australian Institute of Family Studies. But their parents are often sitting on massive capital increases in property assets, despite recent downturns.

We again acknowledge Duncan Hughs and the Australian Financial Review with thanks for this wonderful overview … we hope will help in your planning.

 

 

 

 

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