Keep it in the family for a win-win
Despite historically low interest rates, booming house prices are frustrating the goal of many Australians to achieve home ownership. Government policies subsidising geared investment investor purchases and targeting cash assistance for first home buyers only for newly constructed properties don't help. The resulting financial pressure on owner-occupiers with large mortgages is increased by high marginal tax rates on earned income and the compulsory diversion of a minimum of 9.5 percent of gross salary into compulsory super.
Some employers, including the federal government and universities, exacerbate the problems facing their employees seeking to achieve home ownership by taking even higher compulsory super contributions of 15.4 percent (federal government) and 17 percent (universities) out of employee remuneration.
The high marginal personal income tax rates now applying increase the costs of servicing an owner-occupied mortgage by between 50 percent (35 percent rate) and 100 percent (49 percent rate) more than the effective cost to investors. Thus, even though mortgage interest rates have fallen sharply, many owner-occupiers struggle to service their mortgages.
The tax arrangements also increase the value of any assistance from families available to reduce the outstanding mortgage. There are tax advantages for both givers and recipients of the family assistance. By gifting or lending money interest-free to relatives, the donors reduce their personal income tax liabilities. If the gift was made five years or more previously they will also reduce their assets subject to the age pension asset test.
The benefit to the children is the saving in mortgage interest from having a lower level of debt. This benefit accumulates at compound interest free of tax over the life of the mortgage, allowing the debt to be repaid more quickly. An added benefit of helping to reduce the size of the mortgage is the higher return available to the family.
Invested in a term deposit, current interest rates would not be more than 3 percent a year taxable. Even at the lowest 19 percent tax rate, the return would be only 50 percent of the interest saved by reducing the size of the mortgage.
Now that interest rates available to investors are low and likely to fall further, assisting the family to achieve home ownership is an increasingly attractive option. The government could help families likely to need as much as they can find for their own retirement to provide temporary assistance to their children by changing the 1993 ATO ruling on mortgage offset accounts to allow relatives to open mortgage offset accounts against the mortgages of owner-occupier children.