Many young professional couples have the repayment capacity but not the saving capacity to buy their first home. If parents or grandparents can help them get the deposit they may be able to move into a purchase decision.

According to Mortgage Choice’s 2016 Annual First Home Buyer survey, 4.9% of all first home buyers had a parent or immediate family member go guarantor on their home loan, up from 3.9% in 2015 and 3.8% in 2014.

With ever-rising property prices outstripping wage growth, it’s no wonder few prospective first home buyers can purchase a property without family financial assistance.

Before parents or grandparents help, it is recommended they see a financial adviser to determine how much to provide. Most parents and grandparents before helping their children, have achieved their own financial goals such as:

  • Paid off their mortgage
  • Become financially independent
  • Own a holiday home outright

At a minimum, parents and grandparents should generally make sure they have enough rainy day money and are financially comfortable before helping their children and grandchildren.

Gift, Loan or Other?

One way to help adult children buy a home is providing a monetary gift to help with a deposit. The problem with gifting is that the money is not protected in the event your child is married or in a relationship, and your child and partner then separate or divorce.

In the event of a relationship breakdown, the gift becomes part of the joint assets of the relationship.

Another issue with gifting is where parents intend to receive the Age Pension within the next 5 years. Any asset or amount over or above $10,000 gifted by a single person or couple in a single financial year or above $30,000 over a 5 year rolling period impacts on parents’ pension entitlements for 5 years.

What about a Loan?

Lending to children can achieve a similar outcome to gifting but with greater protection. By structuring financial assistance as a loan – even if the parents do not intend to ask the child to repay the debt – the parents have the option to recall the money.

A loan is probably a better way to go to protect parents’ interests. This can be achieved through a written loan agreement. Even though children may view this as an expression of distrust, a written agreement would give all parties certainty about what has been agreed and what is expected of everyone. It would show the family that they are serious about repaying the loan.

A loan agreement would ensure that the parents’ rights are protected in the event a child’s relationship with his or her spouse or partner broke down. It would also be helpful in preventing sibling jealousy with respect to parents’ assets and future inheritances.

It may also be important to have the loan secured by an asset to help ensure funds can be made available to repay the loan if required.

A loan can be forgiven on the parents’ death. Establishing a loan is more costly than gifting money.

Going Guarantor!

This allows parents to provide assistance without giving cash upfront by using their own income or the equity in their property to secure the child’s loan.

A guarantee may allow the child to borrow more than they otherwise could. It may also allow the child to avoid having to pay lender’s mortgage insurance, which can add tens of thousands of dollars to the purchase cost. If the home rises in value, the child may be able to refinance so the parents are no longer providing security.

The problem with acting as guarantor is that if the child defaults on the loan, due to losing their job, accident or illness for instance, the parents are left having to repay it.

Buying a Property Together

Parents could consider buying the property jointly with their children, but this would mean the parents would have their names on the Title Deeds. For both guarantor support and joint ownership of property, parents need to be aware that they are fully liable for their child’s loan obligations.

As further protection, parents who gift or lend money can insist that their child and spouse or partner enter into a binding financial agreement (BFA) to ensure that the gift or loan is repaid if the relationship fails.

The following are some options for parents and grandparents to consider:

  • Should the loan be on an interest free or commercial terms? Generally speaking, the more commercial the terms of the loan, the more likely the courts will be to view the loan as neither an asset of a relationship between a child and spouse/partner nor a financial resource of the child.
  • If interest is charged, will it be fixed or variable or pegged to a bank interest rate?
  • Should the loan be open-ended or does it need to be repaid within a certain timeframe?
  • Should parents request security over the debt, even though the agreement is classed as personal debt?

On the last point, one practical form of security is a caveat over the property. The caveat simply provides notice that a person claims a particular unregistered interest in the property, but it is not as powerful as a mortgage, which creates official rights over the property. In a bankruptcy context, failing to take security over the child’s assets may mean that other creditors get paid before the parent or grandparent.

The Importance of Life Insurance

Regardless of the way parents and grandparents decide to financially help their children/grandchildren purchase a home, life insurance on the lives of children and even their parents should be considered. If illness, injury or even death were to happen to an adult child who had just purchased a home, it would be quite likely that the child – even one with a spouse or partner – would have trouble meeting mortgage repayments and could possibly even lose the home. The consequences would be compounded by the fact that the parents have provided funding, one way or another, with a potential impact on their retirement plans.

The good news in providing financial assistance to children is that due to the age of the children, insurance premiums should be relatively low. Life insurance cover should at least be the amount of the loan or gift, so the parents would not have a shortfall if an insurable event occurs. Income protection insurance for the child should also be considered.

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David Watkins, has been providing advice to clients since 1987. He is a Certified Financial Planner, a member of the Financial Planning Association (FPA), and Superannuation Professionals Association of Australia (SPAA).Google Plus

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