As a parent, you might be wondering how you can help your kids get a foot on the property ladder.
There are several ways to lend a hand, each with its own set of advantages and disadvantages. Let's break down some common approaches:
1. The Gifted Deposit: A generous head start
One of the simplest and most direct ways to help is by gifting your child a sum of money to go towards their deposit.
Pros:
- Reduces the burden: A larger deposit means your child needs to borrow less, potentially leading to smaller mortgage repayments.
- Avoids LMI: A bigger deposit can also help your child avoid paying lenders mortgage insurance (LMI), a significant expense.
- Straightforward: It's a clean transaction with no expectation of repayment.
Cons:
- Impact on your finances: This is a gift, meaning the money is gone. Make sure you can comfortably afford it without jeopardising your own financial security.
- Potential for complications: Lenders usually require a letter confirming the money is a gift and not a loan. If either you or your child receives a pension or other similar support, giving or receiving a gift could impact eligibility.
- No formal agreement: There are no formal agreements in place when money is gifted.
2. Family Pledge Loan (Guarantor Loan): Using your equity
This involves using the equity in your own home as security for your child's home loan.
Pros:
- Reduced deposit: allows your child to buy with a lower upfront contribution.
- Avoids LMI: Can bypass the need for LMI.
- Faster entry: Enables your child to enter the property market sooner.
Cons:
- Significant risk for you: If your child defaults on the loan, you are liable for the debt and could lose your own assets, including your home.
- Impact on your borrowing power: Guaranteeing a loan may affect your ability to borrow or secure loans for other purposes.
You support your child by sharing ownership and responsibilities.
3. Co-Buying: Sharing the load
You and your child purchase the property together, sharing ownership and financial responsibilities.
Pros:
- Increased borrowing capacity: Combining incomes and assets can increase the amount you can borrow together.
- Shared responsibility: Both parties share the financial burden and asset ownership.
- Shared expenses: You can share property expenses, thus reducing out-of-pocket costs for either party.
- Security for the younger buyer: Offers stability and support for your child.
Cons:
- Complexity: These arrangements can be complex and may carry potential tax consequences.
- Agreement needed: A clear agreement is essential to manage issues like unexpected expenses or one party wishing to sell.
- Missed benefits: Children may miss out on first home buyer benefits if they purchase jointly with someone who isn't a first home buyer.
4. Loaning Money: A structured approach
Instead of gifting, you loan money to your child, with or without interest.
Pros:
- Control over funds: You retain some oversight of the money.
- Structured repayment: You can formalise the loan with written agreements, clarifying repayment terms.
- Less risk to your finances: A formal loan agreement with a repayment schedule offers more financial protection than a gift.
Cons:
- Potential for conflict: Loans between families can lead to disputes, especially if the loan is not repaid on time.
- Documentation is key: It's highly recommended to formalise the loan with clear written terms to ensure there is an understanding of when and how the loan will be repaid.
- Tax implications: There can be tax implications, including potentially treating the loan as a deemed, unfranked dividend under Division 7A issues.
5. Other ways to help:
- Covering additional costs: Help with stamp duty, legal fees, and moving expenses.
- Housing your child while they save: Allow them to live at home rent-free or at a reduced rate.
- Providing guidance and advice: Share your experience and insights on buying property..
- Encouraging the First Home Super Saver Scheme (FHSSS): This government initiative allows first home buyers to save for a deposit through their superannuation, providing tax benefits.
Ready to open the Bank of Mum and Dad?
The bottom line
Helping your children enter the property market can be incredibly rewarding.
Each of these options has its merits and drawbacks, and the best choice will vary based on your personal circumstances and financial flexibility.
It's crucial to consider how each method impacts not just your child's finances but also your long-term financial health and family dynamics. Careful planning and open communication are key to making the right decision.
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