The bank of Mum and Dad – avoiding the pitfalls of helping your children buy their first home
After decades of significant growth in Australian property, it is increasingly difficult for younger generations to get their foot in the property market – especially in Sydney and Melbourne.
Domain’s June 2018 House Price Report revealed Sydney’s median house price was $1,144,217 and unit price was $737,080. Based on a typical 20 per cent deposit, a would-be purchaser of a freestanding house in Sydney would need a $228,843.40 deposit plus applicable stamp duty and transactional costs just to buy in.
Even with property prices falling in some capital cities, the Australian dream of home ownership is now out of reach for many young people. It is not surprising to see many parents wanting to assist their children to purchase their first home – here are the pros and cons of the key strategies.
1. Going guarantor
Being guarantor for your child’s home loan is very common but can be fraught with pitfalls if the arrangement is not appropriately structured. These include:
- the full loan (not just a part), being linked to the guarantee
- the loan being structured in such a way that the guaranteed part is not reduced in the first instance
- the bank requiring security over your property, which may prevent you from being able to sell while the guarantee is in place
- the potential for ‘standard’ guarantee terms and terms of your existing home loan inadvertently resulting in your house being used as security where your child uses the same bank as you
- the bank having recourse against you if your child defaults on the loan, which may result in you having to draw upon your retirement savings to pay off the loan, or in the forced sale of the house or even your house.
Understanding the loan structure and your rights and obligations is key. The structure most beneficial to children may not be the one most appropriate for you. Seek advice from a lawyer who can work with you, your financial adviser and mortgage broker to ensure that you are protected. Never sign a guarantee document without first getting advice.
2. Gifts to children
The simplest way of assisting children with purchasing a home is to gift them a sum of money which can be used as a deposit. While this is the simplest strategy and does not require documentation, the main risk is that the gift will form part of the child’s personal or family assets – in which case it may be vulnerable to dissipation if the child goes through a divorce or de-facto relationship breakdown.
Where intended to give all children a similar gift, it may also be necessary to include an ‘equalisation of benefits’ clause in your Will to ensure any other children who have not received their gift are given a ‘top-up’ on their inheritance.
It is important that any intention to gift money to children is considered part of your overarching financial planning strategy as:
- you may require access to the funds for retirement
- any gift to children may still be considered as an asset for Centrelink purposes.
3. Loaning money
A common strategy to protect your financial assistance is to document it as a family loan agreement. This can provide numerous benefits including:
- the bank having no recourse against you (unlike with a guarantor arrangement)
- the loan arrangement potentially enhancing asset protection for your children should they go through a divorce or separation
- for estate planning purposes. As the child will owe money to the estate, if the parents’ Will includes testamentary trusts, on death, the loan can be notionally paid back – received through the testamentary trust controlled by the child, which can then re-lend the funds back to the child (such an arrangement could potentially provide the child with significant tax and asset protection benefits).
Where asset protection is paramount, properly drafted legal documentation is key.
In most cases, a DIY family loan agreement could be seen as a ‘sham arrangement’ – more accurately characterised as a gift or alternatively unenforceable as a result of the statute of limitations that may prevent the loan from being enforced (depending on the terms) where no attempt to seek repayment has been made within a particular period of time (usually six years). While it is tempting to try to save money by drafting your own agreement, given these stakes, you should seek advice.
4. Purchasing property with children
An under-utilised strategy is purchasing property as ‘tenants in common’ with your child. Under this arrangement, the property could be purchased in specific percentages; for example, 20 per cent in your name and 80 per cent in your child’s name.
While such an arrangement is likely to provide a greater degree of protection for the 20 per cent interest as the child would not legally own it, there are potential problems, including:
- the bank requires a first mortgage on the property
- the child may want to draw on equity or sell the property and purchase another
- while you can benefit from an increase in the value of the property if the value of the property increases, like any other asset, you also face the risk of negative equity in a falling market
- where it is intended for your child to ‘buy you out’ during your lifetime, stamp duty may apply on transfer of the remaining interest.
Where this arrangement is implemented, it is necessary to obtain estate planning and financial advice to ensure your child can receive the remaining interest in the property through your Will, and also that it does not adversely affect them from any concessional duty or first home owner grant that they may be eligible for.
Always seek specialist advice
While helping your children purchase their first home is exciting, it can have inadvertent impacts on your financial position, security and retirement plans – plus create estate planning issues. Talking to our Wealth Law team can assist you with implementing the most appropriate strategy for your circumstances and ensure that it is reflected in your estate planning arrangements.
Vik Sundar is a tax and private wealth lawyer and is the Managing Director of Evans Dixon Law. Vik is also the co-author of two leading estate planning texts.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended.