As fast as your adult children are saving a deposit for their first home, you might be watching the price they need to pay pushing higher and further away from them.
And if you’re a parent with a bit of financial security, you may be asking what you can do to help when property prices are relentlessly growing, interest rates are high and volatile, and your kids’ borrowing power is being crushed.
Aussies who have a leg up from what’s become known as the Bank of Mum and Dad are twice as likely to get on the property ladder, says the Transitions into home ownership report from the Australian Housing and Urban Research Institute (AHURI).
So what are the options to help your children into their first home? And what risks do they carry?
Should you gift cash to your children to help them get onto the property ladder
A deposit ‘donation’ can be welcomed. It can assist with both the high deposit now needed and the lower borrowing power but, from your child’s point of view, to get any loan approved, a lender will still want to see a history of solid saving, suggesting they will cope with mortgage repayments.
Besides, I’m a firm believer that the buyer should have ‘pain in the game’. It both ‘invests them’ in the process and increases the satisfaction of the purchase.
Should you offer to match your child’s contribution? Well, maybe.
From parents’ point of view, the risk of the gift of cash is that they might lose it … due to the child defaulting on the mortgage or in the case of a separation.
Did you know that parental property help is largely responsible for a big spike in prenups or binding financial agreements in Australia? If made right, one of these can mitigate at least this risk.
A will can also be used to keep things equitable with other kids, if relevant – for example, $50,000 gifted early to one can be balanced with $50,000 extra left to another.
But you’ll need to be aware that if you’re retired you can only give away $10,000 a year or $50,000 over five years before it affects the Age Pension. This is considered a deprivation of your assets and the excess will still count in the tests for eligibility, the assets test and deemed income test.
Before you retire though, there are no greater implications as there is no ‘gift tax’ in Australia.
Should you tap into your home’s equity to help your children buy a home?
Another option is to keep your cash but tap into the equity in your own house. And this may suit better if you – like many baby boomers – are asset rich but cash poor.
You can ‘go guarantor’ for your adult children’s property purchase by putting up a chunk of equity from your own home as security for the new loan.
A double advantage of this – for your kids – is if it brings the amount they have to borrow to less than 80 per cent (called the loan-to-value ratio), they avoid expensive lenders mortgage insurance (LMI). This can save them tens of thousands of dollars and can further aid their purchase.
You, however, are putting your house on the line: if they get into financial strife and fail to make repayments, you could lose it. For this reason, it is a risky move.
One way of lowering your exposure is to ‘put up’ the minimum equity possible.
You could plan to refinance out of the loan – and remove yourself as guarantor – as soon as the new property (hopefully) grows enough to allow it.
If this sounds too worrying, regardless, you could instead downsize your family home to extract equity … and distribute the profits as you see fit, bearing in mind the ‘sharing-cash’ considerations already mentioned.
You could also access equity without selling your family home. This is possible if you’re working and can make the repayments, and have a mortgage that lets you redraw surplus money or draw down on a line of credit.
If you are 60 or older, you could take out a commercial reverse mortgage or take up the Services Australia Home Equity Access Scheme (from age 67). These are repaid from the sale of your home when you die (or earlier if sold).
In any case, that binding financial agreement to protect against your child’s partnership going sour (and maybe an equalising will for any other children) is also essential here.
Then there are options to assist your kids that are a little more, well, complicated …
Should you ‘gift’ a property to your child?
Perhaps you have a ‘spare’ property and have wondered: “Could I sign it over to my child?”
Unfortunately, not without triggering – probably significant – capital gains and stamp duty. This is not the case if they later inherit it.
There is another idea, though, that might work and be relevant if you are a little more concerned about your kids – or more accurately their financial acumen: you can help them into housing via a trust structure.
Here, you would buy the property within a family trust and you would be the trustee of that trust. It would be an investment property like any other, rented by your son and daughter with your expenses tax deductible.
If you later felt it was right, you could pass control of the trust over to them, which might be free of capital gains tax and stamp duty if a company was also included as a trustee, but this strategy would certainly require additional legal and accounting advice.
Whatever your decision, it’s a tough world out there for our offspring. According to the AHURI report, today’s first home buyer now takes more than six years to save a house deposit in Sydney and Melbourne.
If you’d like to help your kids get on the property ladder – and you’re in a position to do it – whichever way you go about it, the Bank of Mum and Dad can significantly cut that time.
Also read: Inheriting a property? Don’t get stung by the taxman.
Financial disclaimer: All advice in this article is general in nature and the author’s own opinion. Always check with a financial professional before making any decisions.
