Buying a first home has always been a financial challenge, but housing affordability in Australia has declined so much in recent decades that younger generations are struggling to gain entry to the property market at all. As a result, more parents wish to take practical steps to help their children step onto the property ladder.
This article explores three common ways that parents can assist their kids buy a home: through a gift of cash, a loan, or by acting as a guarantor. In addition, we will look at two less common approaches: co-ownership purchases and using trusts to assist children to make their first home purchase. We’ll delve into the pros and cons of each approach, highlighting key considerations and the main risks of each option. The information is general only and we strongly recommend that you seek professional advice before taking any course of action.
Gifts
Many parents choose to simply provide their children with a monetary gift to assist with their first property purchase. This gift can be used for a deposit or to reduce the mortgage amount.
This is a generous gesture that provides children with the maximum freedom to immediately use the funds to assist them with a property purchase. In addition, receiving this gift should have no tax implications for the recipient.
However, such a gift will have an irrevocable impact on the parents’ finances, without the promise of future repayment. Parents should only make such a gift if it will have no impact on their financial security in the future.
Loans
Alternatively, parents can opt to provide a loan to their children to be repaid over time, with or without interest. These loans may be recorded in a formal written loan document, although it is not uncommon for these loans to be verbally agreed between the family members.
Loaning money provides a structured approach to assist children with the purchase of a home. With a carefully drafted loan agreement, including a structured repayment schedule, this can be a way for parents to help with less risk to their own financial security.
However, loans between families can be a source of relationship conflict, especially if the loan is not repaid in a timely fashion. Moreover, family loans are often not well documented, and this can result in the parties having a very different understanding of their obligations. In the worst case, these arrangements can result in legal challenges and a breakdown of family relations.
Seeking legal advice when loaning money is a wise step. A legal professional can draft clear agreements and ensure that all parties fully understand the terms and consequences.
Guarantor
Going guarantor usually means that parents use their own property or assets as collateral to secure a home loan for their children. This approach can help their kids avoid paying Lender’s Mortgage Insurance and may allow a purchase to go ahead with a substantially smaller deposit.
This approach enables parents with assets, such as a family home, but limited free cash, to help their children without having to put up any money of their own. Most significantly, by reducing the need for a large deposit, going guarantor can assist children to enter the property market many years earlier than they may be able to manage without assistance.
However, it is very important that parents realise that this is not a low-risk option. Too often, parents will go guarantor without fully understanding that they can lose their own assets (including their home) and are personally liable for repayment of the loan if their children fail to meet their mortgage repayments.
Property Co-ownership
A less common option is for parents to purchase a property with their children, sharing both the financial and legal responsibility. This provides a sense of security for the younger buyer and allows for sharing property expenses. It also has the benefit that both parties will gain from any increased equity. This can be an especially good option for parents of young adult children, who can share a house purchase with a child that would otherwise have to wait many years to afford their own property.
However, like the other options discussed, this approach can be fraught with challenges. First, it is vital that the correct ownership structure is chosen, so that there is no doubt as to what happens to the property if one party passes away or wishes to sell. It is also important that there is an agreement about how issues will be dealt with during the life of the co-ownership, such as unexpected property expenses. You should plan for various future scenarios, such as what happens if your child decides to sell the property or if you want to reclaim your investment. Having an exit strategy in place can help prevent potential disputes.
Finally, 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.
Family Trusts
Often families with significant or complex assets will use a family trust to assist their children, or even grandchildren, to purchase property. A trust can offer various options for transferring property or assets to children while allowing parents to maintain control and direction over the assets.
This approach can have tax benefits, although this is an area where it is necessary to obtain expert advice tailored to the circumstances. The need for ongoing legal and financial advice and administration can make this a complex and expensive option. It is usually only advisable for families with significant or complicated assets, or where control and protection of the asset is an important consideration.
Conclusion
Money can strain even the most amicable relationships. Consider the potential impact on family dynamics when providing financial assistance to your children and discuss expectations and obligations openly.
Each method, whether gifting, loaning, going guarantor, co-ownership, or establishing family trusts, comes with its own set of advantages and drawbacks. Consider the potential impact on family relationships, document financial transactions to mitigate risks, and seek legal and financial advice to make informed decisions.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 4588 5955 or email [email protected].