24/10/2017
Should parents help their children buy their first home is a question getting asked more and more these days. And why not....what can go wrong......
Plenty.....but with careful planning a discussion, you can minimise and hopefully avoid the pitfalls, so lets look at them.
Problem: With property prices growing faster than wage growth, the ability to get into the market seems out of reach for many younger (and older) people.
As financial planners we will look at ALL aspects from everyone's perspective and we will raise the 'what'ifs' when sometimes you may find if difficult to ask those questions.
Options: From a parents perspective, you have a few options to assist your children:
1) You can gift the money to help with a deposit
Just be aware that if you (the parents) are planning to receive the Age Pension in the next five years, the gift will still be counted as an asset of yours for a few years and thus may reduce your Age Pension a little
Also, as parents you need to understand that any gift given to your child is not protected in the event of a divorce or separation, therefore the gift becomes part of the joint assets of the relationship
If the money is a gift, when the children apply for a loan, they will need to get a Stat Dec from the parents confirming that the money is a gift and NOT to be paid back, otherwise often the lender will not approve the loan application
2) Written Loan Agreement
A better option may be to have a proper written loan agreement drawn up, children may view this as an expression of distrust, but a written agreement gives all parties certainty about what is expected of everyone
From a children's perspective, it shows that they are serious about paying back the loan
From a parents perspective, it allows their interest to be protected in an event of a relationship breakdown of the children
3) Guarantor
So parents could go a Guarantor on a loan for their children, this is becoming popular and nearly all lenders allow this. Parents need to understand that by going Guarantor, you are saying to the bank or lender..'if my child cannot make the loan repayment, I will....'
4) Buying jointly with your children
Why not....it doesn't have to be 50/50, parents could go on the title as 'Tenants In Common' with say a 20% ownership or whatever percentage you decide. Over time this may be more common than we think.
Parents should always obtain specialist legal and taxation advice when setting up a loan with their children.
Things to consider when organising a written agreement:
Will the loan be interest only, interest free or on commercial terms
Will the interest rate be fixed or variable
Should the loan be open ended or does the loan need to be repaid within a certain period of time
As parents, you may want to place a Caveat over the property. A caveat is not as official as being on the mortgage, therefore a lender or bank get first rights to the proceeds if the property was ever sold
The most important of all considerations:
Far too many times we have seen people think a little to 'one dimensional'. So let us expand that a little with some basic questions:
What happens when (or if) your child is unable to work due to an accident or illness? Where is the income going to come from? Income protection of the children is a must.
What happens if there is a death of a parent or the child, is their sufficient cover Life insurance?
Is the house fully covered for Building Insurance?
Summary:
Most parents are willing to assist their children and there are a few paths to consider. We are happy to assist you to discuss the options and raise the different scenarios with all parties.
General warning: The above information is general by nature and not be taken as personal advice. Everyone's circumstances will differ and therefore our advice will differ. Please use this information as informative and should you want advice, we are happy to discuss that with you.
