Buying a first home has become increasingly difficult for young Australians due to several factors. High property prices, especially in capital cities, make it challenging to afford a home. Supply-side issues, the need for more affordable housing, and access to trades further complicate the situation. Initiatives like the Help to Buy co-ownership scheme aim to address these challenges. Additionally, rising interest rates have increased the cost of servicing debt, and stagnant wages have not kept pace with the rising house prices, making it harder for young Australians to save for a deposit and afford mortgage repayments.
At Bartons, we are receiving more questions from our clients on how they can help their children (and sometimes grandchildren) to enter the property market.
Key Items to Borrow Money
Before diving into the specifics, it’s important to recap two key items necessary for borrowing money: the deposit or capital contribution and the ability to service the loan. The deposit helps keep borrowing levels below the bank’s upper limit, often referred to as the Loan to Value Ratio (LVR). For example, if a house costs $500,000 and the bank requires an LVR of 80%, the borrower needs a deposit of $100,000 (20% of the house price).
Serviceability, on the other hand, is the lender’s assessment of the borrower’s ability to have sufficient cash flow to afford the loan. While there are many strategies to assist with the deposit/LVR aspects, it can be more challenging to assist with serviceability.
Common Ways Parents Can Help Their Children Buy a Home
Parents often look for ways to help their children buy a home. One common method is gifting money to help with the deposit. However, parents should be aware of Centrelink gifting implications, as gifts over a certain amount can affect pension entitlements. While seemingly obvious, a gift is given with no expectation of repayment.
Another option is providing a loan, which can be structured formally to protect both parties. A formal loan agreement ensures clarity and legal protection. Parents can also act as guarantors, using their home equity to secure their child’s loan. No physical capital exchanges hands, but the child’s lender has a legal interest in the parents’ property.
Implications of Gifting Money to Children for a Home Purchase
Gifting money to children for a home purchase has several implications. There is a risk of relationship breakdown, so it’s advisable to get legal advice to avoid potential conflicts. The recipient does not pay tax on the gifted amount, but gifting can affect pension entitlements. Parents need to assess their children’s capacity to repay the gift, as it can lead to challenging family dynamics. In extreme cases, parents may need to come to terms with the possibility of not getting the money back.
Structuring a Loan to Help Children Buy a Home
When lending money to help children buy a home, it’s important to have a formal loan agreement to ensure clarity and legal protection for both parties. Interest-free or low-interest loans can be beneficial but should be documented. While children have access to the parents’ capital, the lender may view the arrangement as a loan, potentially reducing the child’s loan serviceability.
Risks of Acting as Guarantors
Acting as guarantors for their children’s home loans comes with risks. The parents’ home may be at risk if the child defaults. It’s generally suggested that children repay their parents first or consider further borrowings to repay the parents as equity becomes available. This can be achieved by structuring a loan ‘split’ whereby the child can focus on paying down of the ‘guarantor portion’ first. Guarantees can also affect parents’ ability to access their own equity, especially if they have their own property portfolio and growth aspirations. Parents often seek fairness when dealing with multiple children, so similar arrangements should be considered for subsequent children.
Government Schemes and Incentives
There are several government schemes and incentives to help young Australians buy their first home. The First Home Owner Grant (FHOG) provides financial assistance to first-time buyers of newly built / never lived in properties. Stamp duty concessions are available for properties within certain price ranges, again for newly built/never lived in properties and the First Home Super Saver Scheme (FHSSS) allows saving for a home deposit within superannuation.
Legal Considerations for Parents
Parents should be aware of several legal considerations when helping their children buy a home. Joint ownership structures can be complex and may not align with the goals of both parents and children. It’s important to consider how the assistance fits into the overall financial plan and to have clear communication to avoid misunderstandings. Legal documentation is crucial to ensure clarity and protection.
Additionally, in the event of a matrimonial breakdown of the child, gifts are likely to form part of the pool of property to be divided between the parties. If one of your goals is to keep the gift within the family bloodline, it is highly recommended to seek specialist legal advice in this area.
Alternative Ways to Help Children Save for a Home Deposit
There are alternative ways to help children save for a home deposit, such as encouraging savings and budgeting. Teaching financial discipline and savings strategies can be very effective. For particularly young children, given a multi-decade investment timeframe, consider investments that are not simply a bank account to aim for a higher deposit in later life.
Considerations Before Helping Children Buy a Home
Before deciding to help their children buy a home, parents should consider their own financial stability and ensure their own financial security first. It’s also important to consider the long-term impact of the assistance and how it fits into their retirement plans.
Get in Touch with Bartons
For personalised advice on helping your children buy a home, speak with our Lending Team. We’re here to help you navigate these complex decisions.