How to help children to buy home
How to help children to buy home
Properties in every Australian city have gone up to astronomical values. The same has been happening in the country, and if you believe our property market is dramatically overpriced and you are waiting for a huge shakeup so your children can buy their family home at a much lower price, I don’t think this is going to happen. Australian property prices might drop by 10% or so, and then it will continue its usual upwards trend again in some point in the future. This is what I hear from property experts.
With an average property prices in major Australian cities close to a $1M, and regional dwellings over $600K, obviously there are big discrepancies between Australian states, it is becoming harder and harder for your children to enter the housing market.
So no wonder, that many parents are contemplating helping their children.
But a simple act of trying to help your children to buy their first family home can have incredibly negative impact on you if done incorrectly. And this is what we are discussing today.
There are number of issues you have to review and research before you proceed with any financial support for your kids, especially when considering a property purchase, which requires a major financial commitment or expenses on your part.
1. Never, ever give your kids the full ownership to the property as a gift.
You have just taken away the main part of learning of how to become a responsible adult. I know that sometimes it s a cultural thing but we all need to learn how to budget, how to be responsible for our mortgage, how to live within our means, not to mention the personal satisfaction of self-achievement. We don’t value things given to us, as much as what we personally achieve through hard work, dedication, and daily responsibility.
Helping and caring is one thing but giving it all on a platter is not character building and can actually create more harm than good in a long run.
2. Family dynamic
If you have more than one child, then financial assistance might be more difficult or more complex. You need to first consider if you are able to provide a similar assistance to each of your children. You cannot help one and not the other, that is just creating a family conflict and resentment.
If one child has a particular problem now and you feel that your help is more appropriate there, then have an open conversation with your children to let them know and make an agreement, than the other child knows he/she will be compensated later. That assistance or your financial help needs to be fair, whether you are assisting now, in few years or through the Will on distribution of your estate. But all parties involved need to know it and agree to it, so there is no hard feeling between family members.
Sometimes I do hear parents say: I will help my daughter because she is close to us, she is staying in touch, but we don’t want to give anything to our son, as he is a disaster of a person, moved out and he doesn’t even bother to call to see how we are.
I can understand how you feel, but from the legal standpoint, both children are treated equally, and if you help one, or worse, if you leave your full estate to one child and not the other, this is a legal challenge waiting to happen.
So always be fair and open to protect your family relationship.
3. Financial strategies to help
- a gift
This is most likely the simplest way to provide financial assistance to your children. Generally, there are no tax consequences, you don’t need to set up any legal structures, but once you give the money, it is gone, so don’t include it in your retirement planning any longer.
Please think twice before giving money away, as I know many retirees, who regret that decision in later years of their lives. The main issues are:
- you may run of money and cannot afford the lifestyle you used to enjoy before.
- A big drawback is if your child’s relationships break down. Be aware that your child’s partner will be entitled to half of that money you gifted.
- If your child is running a business and the business fails, that there is a very high probability that creditors will be entitled to that money.
In most cases gifting is nice and easy, but you have to be aware of those risks.
This is a very similar option, but at least there should be a legal agreement between you and your child. The agreement should specify all agreed terms of the loan, such as:
- level of repayments, if you don’t want to receive any repayments, you can do that, but it still needs to be listed in the agreement
- interest rate – if you want to charge any interest you can, but you don’t have to
- repayment term – you can specify the time when the loan is to be repaid in full or in parts. This is your private agreement, and you make up rules, but the biggest benefit is that you have a right to recall the money and it is one simple trick to keep money within the family unit, in case your child’s marriage ends in divorce.
- you can forgive the loan on your death – this is another option available to parents
The main drawback of the loan is that it has to be a legal agreement, which might be a costly exercise, but if you don’t do it, the whole idea to help your children might end disastrous for you.
- becoming a guarantor
Very often parents would like to help, but they just simply might not have enough cash sitting in a bank account not knowing what to do with it. And please do not withdraw your lifesavings from your super fund to do this. Next to your home, this most likely is the best tax and saving vehicle you will ever have.
Therefore, another option is to use parent’s family home as a guarantee for children’s home loan, if they do not have a sufficient deposit. But before you jump to this option, always be aware of drawbacks and consequences:
- if your child cannot meet loan repayments, you are required to make those repayments. You might be required to pay off the full amount if the child defaults. Therefore, before you jump into setting up this solution, first you should really check how responsible is your child with money and with savings. Also, this should be imposed on your children to have appropriate insurance in place to cover the outstanding loan with you as a beneficiary of life insurance. Another policy to insist to be put in place is income protection and disability cover. This way if any health or life drama strikes, at least finances of both parents and children will not be sacrified or diminish altogether.
- Similar problem as discussed before in gifting money to your child. Similarly, when becoming a guarantor and the property is purchase on both names: your child’s and partner’s names, if that relationship fails, you child will lose half of the house, but you as a guarantor will remain liable for the full value of the loan.
- Obviously don’t forget that becoming a guarantor will reduce your own capacity to borrow, hence if later would like to buy a new car, rental property or borrow funds to fix your home, you might find additional borrowing quite challenging if not impossible.
- buying together
Some parents are happy to buy a property together with their children as a joint ownership, either directly on their names or through the family trust structure. The idea is that the child will slowly over time, or later in life in one lump sum, buy out the full property to take full ownership of this property.
The problem in here is:
- your child will not be eligible for first-homeowner grant
- on transfer of property to a child, parents will have to pay Capital Gains Tax, which might be quite considerable due to property growth overtime, and it might come at the time, when you have retired already, and it is not a bill you can afford.
4. Other issues to consider
As you can see each option has some negatives, so I suppose your job is to do your due diligence of which one is the best suitable, has the least negative impact on you and your future financial plans.
Before you start setting everything up you should first:
- Have an open conversation with your child or your children about the situation and all points mentioned today, together with all the negative impact such assistance may have on you.
- Get proper legal advice
- Get full financial advice, not only about “How can I help, but also how to protect myself” but if you are nearing retirement and you wish to be eligible for Age Pension, each of those options will have a different impact your Age Pension differently. This will be explained in a separate video.
- Discuss with financial planner all essential life insurance policies your child that you are helping has to have. This will introduce financial security for you both.
This is a very heavy subject, but necessary to discuss and explain, as I see often mistakes parents make, not realising of the negative effect it might eventually have later in life, therefore I strongly recommend to always receive a proper professional advice to mitigate any possibility of things going wrong.
If this is the assistance you contemplate and don’t know which option is the best for you, just contact me for a personal advice to clearly understand your choices, all benefits and drawbacks before you commit to any help.
Retirement is a Journey not a Destination, so be well prepared for this Ride.
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