7 legal, tax and finance-safe steps to help your kids onto the property ladder
The interest rate hiking cycle might have peaked, but it’ll be some time until rates drop, borrowing capacity increases and Australia’s property market reopens to more first-home buyers.
So it’s no wonder that housing affordability (or unaffordability) is such a popular topic at the moment.
There’s no denying it has become a lot harder to make the first step, mainly due to the hurdle of saving up a big enough deposit to meet the bank’s requirements.
Especially when it comes to questioning how our younger generations will ever be able to make their first step on the property ladder at a time when the crippling cost of living and rising interest rates push home ownership out of reach for many.
But parents have been helping their children buy properties for generations and many will be happy to do the same to help their children in future.
The Bank of Mum and Dad provided nearly $3 billion worth of funding to adult children in 2023, the AFR reports, making it one of the nation’s largest residential property lenders.
Such support has increased fivefold in the past five years to assist about 60% of first-home buyers.
But while it’s great news that there are several ways that parents can help their kids onto the property ladder, the bad news is many generous parents are unknowingly creating a minefield of problems for both their own futures and that of their families.
Here are 7 steps to help your kids onto the property ladder without detonating a legal, tax or financial minefield that could sabotage your (or their) future.
1. Work out the safest way to do it
Generally, there are two ways a parent can help their kid buy property – a guarantor loan or a cash gift.
Option 1: A guarantor loan
One of the most common ways that parents help their children is by agreeing to a guarantee loan.
A guarantor loan is a loan product that offers up some of their equity to their child or children to assist with the deposit.
For example, perhaps your daughter could only save $30,000 but needs $60,000 to qualify for a home loan.
If you’re thinking about guaranteeing a loan, make sure you understand the risks.
Take the same care as if you were taking out a loan for yourself.
For example, if you apply for a loan in the future, you’ll have to tell your lender if you’re a guarantor on any other loans.
They might decide not to lend to you, even if the loan that you guaranteed is being repaid.
It’s important to recognise, however, that while you may not have ownership rights over the property, you may be wholly responsible for the entire loan if your daughter or son defaults.
In fact, lawyers say a growing number of court cases involving bitter family disputes about what was agreed and who is responsible for outstanding debts underlines the need for any loan or gift to be carefully documented.
With loans, the minimum a parent should do is register it against the title of the child’s property to make others aware of their interest.
Alternatively, you could lodge a caveat on your child’s property to protect your “equitable mortgage”.
And always have a written loan agreement, even if asking your child to do this might feel a bit awkward at the time because it is so much safer for you to have evidence of a loan agreement.
If you’re considering this option, you should access expert advice before proceeding.
Option 2: A financial gift
As a parent, we all want our children to have good lives and to be successful if that’s what they desire to do.
But does that mindset extend to giving them a financial gift to buy a property?
In my opinion, it really is a personal decision and will depend on factors such as your child’s capability to manage a home loan.
If your son or daughter has been spending every cent that they’ve earned for years, which is why they haven’t saved a property deposit, is it really a good idea to just give them a handout?
Will they have the necessary financial discipline and know-how to not default on their mortgage repayments?
Perhaps a better idea could be to suggest a financial gift that matches their savings.
So, if they knuckle down and save $25,000, then you will tip in an equal amount to bump it up to $50,000.
That way, your child will learn how to save and you will be more confident that they’re not taking on more than they can financially handle.
But parents need to be very clear about whether they’re providing their children with a gift or a loan.
If the money is a gift, this should be made clear in writing to avoid confusion down the track.
If the money is a loan, as mentioned you should write up a loan agreement detailing the size of the loan, the term and how it will be repaid.
So, before you decide on a strategy to help your children buy property, you must ensure you have accessed expert advice from a qualified wealth strategist.
That way, it reduces the chance of any ugly fallouts which could totally undo your original good intentions.
2. Giving a cash sum? Decide how much to give.
Parental contributions vary according to state and territory property prices, with an average of about $92,000 in NSW and $34,000 in Western Australia, according to Jarden Australia, an investment bank and wealth manager.
The national average is about $70,000, and nearly 5% receive more than $200,000, its analysis shows.
Larger assistance is generally provided in NSW and Victoria where property prices are the highest – typically about 10% of median dwelling values.
Parental assistance in Western Australia, where property prices are the lowest, equates to about 6% of dwelling values.
3. Make sure you’re being fair
Making sure a loan is fair for lenders, borrowers and all family members – particularly siblings – can make or break a transaction, lower the risk of damaging disputes and maintain harmony, specialists told the AFR.
This includes ensuring parents can afford to subsidise their child’s purchase and that other siblings are comfortable with the amount of a gift or loan (plus repayment terms), which might mean amendments to parents’ wills to ensure equal treatment.
Parents first need to assess the impact of a loan on their own finances by calculating the amount of money they will need in retirement and whether it will affect their access to other credit.
Here’s an example of how the type of help parents give affects their own finances.
Source: AFR
Craig Hollett, a director of Solomon Hollett Lawyers told the AFR of cases where some children are increasingly helping themselves to their parents’ wealth, creating potential problems with siblings.
For example, children are using enduring powers of attorney, authorising them to make legal and financial decisions when parents no longer can, to claim they have the authority to cash in their inheritance early.
Alternatively, they pressure elderly parents to forgive debt.
“This can become sinister when one child gets more than others,” says Hollett. “Wills should make provision to ensure that all children are treated fairly.”
For this reason, it’s vital that all you write the agreement down, including terms of what has been agreed and what should happen should circumstances change.
This should include everything that has been discussed, with details of who has agreed on what and an idea of the timeframe.
Remember, verbal agreements are as legally enforceable as written ones, but you will have problems when you need to prove they exist.
4. Parents should think about their own retirement before handing over cash lump sums
Australians on part-age pensions, or other Centrelink benefits, need to ensure these are not jeopardised.
Remember that the government includes gifts over $10,000 a year or $30,000 over five years as assessable assets so retirees should look carefully at the assets test used to calculate the rate of age pension.
Source: AFR
5. Ensure you’re being tax-savvy
There are no tax implications for either the giver or receiver for cash gifts but capital gains tax needs to be considered when gifting other types of assets… such as property.
So that means a property inherited by, or given to, children from their parents or other family members may come with an attached capital gains liability.
Generally, CGT does not apply when you inherit property but it may apply when you later dispose of or sell it.
That’s because, in the case of an inherited or deceased estate, the transfer of ownership to you (i.e the inheritance transaction) isn’t considered a CGT event.
And if the transfer isn’t considered a CGT event, there is no capital gains tax liability.
However, if you decide to sell the property, CGT on the inherited property may apply.
There are ways for a receiver to reduce their capital gains liability on the sale of the property, but to avoid creating more problems down the track the process needs to be thoroughly researched and planned.
6. Make yourself aware of the dangers
· Risks for guarantors
About 1 in 3 parents guarantees a loan, which could expose them to extreme financial risk if the child defaults, including the possibility of losing their own home.
That’s because, as I mentioned above, the parents agree to take responsibility for mortgage repayments if the child is unable to make them.
And this can extend right into their retirement.
So parents should specify whether the loan guarantee is partial or full – even a partial guarantee of the first 25% of a loan reduces exposure and limits risk.
· Risks for loans
Loans are expected to be repaid at a specified interest rate, with terms and conditions setting out the lenders’ rights on default.
Therefore, parents offering a loan should set out a loan agreement specifying things like the interest rate, term and the lender’s rights in the case of default.
This helps to lower the risk of expensive legal fees and damaging credit scores, which affects the future capacity to borrow.
A loan is preferable to a gift where the child is in a relationship and there are fears a partner could walk away with family money.
· Risks for gifts
Parents gifting money have different risks to look out for – a gift is seen as something where there is no expectation of repayment.
This still needs to be documented, including how much was gifted, to whom and for what purpose, including a statement saying it doesn’t need to be repaid to avoid confusion down the track.
7. Keep an eye on lenders’ special deals
Several lenders provide incentives for family members to assist in buying property, according to Canstar.
These help buyers avoid LMI with a lower deposit, increase their buying budget and access lower interest rates but those considering a deal need to compare terms and conditions which differ for each lender.
