As housing affordability in Australia remains a real issue, and younger generations are struggling to gain entry to the property market, more parents wish to help their children buy their first home.
However, even the most generous parents must consider how this decision will affect both them and their children in the long run. Will the assistance be a one-time offer or ongoing? What risks are involved, and do the benefits outweigh them?
"...once money is gifted, parents have little recourse to reclaim it if needed. If the child goes through a divorce or separation with their partner, the gift could be considered part of the matrimonial pool and divided accordingly, regardless of your intentions..."
The common methods parents use to help their children buy property include:
Gifts
Many parents choose to simply provide their children with a monetary gift to assist with their first property purchase. This gift can be used for a deposit or to reduce the amount their children need to borrow from banks.
However, once money is gifted, parents have little recourse to reclaim it if needed. If the child goes through a divorce or separation with their partner, the gift could be considered part of the matrimonial pool and given to the partner accordingly, regardless of your intentions. Similarly, if your child faces financial difficulties or creditors, your gift would be lost in the liquidation of their assets.
Loans
To safeguard your interests and those of your children in case of relationship breakdowns or financial issues, it might be wiser to loan the funds.
Loaning money provides a structured approach to assist children with the purchase of a home. With a carefully drafted loan agreement, a loan offers more security and clarity, allowing you to call upon the loan if necessary. This arrangement may serve to remove loaned funds from a matrimonial asset pool and/or allow you to claim as a creditor if necessary. This would mean the money stays within your family.
Proper legal advice is essential to ensure the loan arrangement is effectively established and recorded, and potentially registered on title as a mortgage for additional protection.
Going Guarantor
Going guarantor typically involves parents offering their property or assets as security to obtain a home loan for their children. This approach can help their kids avoid paying Lender’s Mortgage Insurance and may allow a purchase to go ahead with a substantially smaller deposit.
This enables parents with assets, such as a family home, but limited free cash, to help their children without having to put up any money of their own. Most significantly, by reducing the need for a large deposit, going guarantor can assist children to enter the property market many years earlier than they may be able to manage without assistance.
However, it is important to be aware that this is not a low-risk option. Too often, parents will go guarantor without fully understanding that they can lose their own assets (including their home) and are personally liable for repayment of the loan if their children fail to meet their mortgage repayments. Guaranteeing another person's debt, especially with unlimited liability, is a serious decision that should not be taken lightly.
Buying or Borrowing Together
Another option is purchasing the property jointly with your child. This allows you to retain some control as your name is on the title but can also have significant tax and estate planning implications that need careful consideration. It is also important that there is a written co-ownership agreement in place about how issues will be dealt with during the life of the co-ownership, such as unexpected property expenses. You should plan for various future scenarios, such as what happens if your child decides to sell the property or if you want to reclaim your investment. Having an exit strategy in place can help prevent potential disputes.
To protect everyone's interests, seek proper legal advice from the outset to ensure your good intentions are met with minimal risk and tax-efficient, thoughtful planning.
At CGC Law we have solicitors serving the Sutherland Shire and Greater Sydney area, who specialise in Commercial Law and Estate Planning to guide you on giving your children a head start while minimising the risk. To discuss your situation, Call or email us.