As every child knows, the Bank of Mum and Dad™ is the best one out there: little to no repayments, sometimes you can just borrow and beg for forgiveness later if you think it’s worth it, and it’s very likely that you have access for a long time (at minimum, 18 years) at no cost. As every parent knows however, the Bank of Mum and Dad™ is there because you love your children and want to support them and make them happy, even if they raid your piggy bank regularly and didn’t think you notice.
There has been much said about this generation of Millenials leaving home much later, however data from the 2016 National Census showed only a margin increase in the time that children remained at the family home. The largest change however was that children were more likely to leave the parental home to rent rather than to buy a home (up 3% from 2011 to 2016). Most people consider this a reflection of relative home affordability, in that property is becoming increasingly expensive when compared with the average wage. If you are trying to buy a property in Sydney or Melbourne, you have home prices increasing by as much as 20% a year whilst wages growth is only 2.3% according to the ABS. The consequence is it is just so much harder to save the much larger deposit amounts required and then to service the mortgage repayments (although our low interest rate environment is certainly helping in this regard).
Many parents find that they want to help their children buy their first home. Some may say it is to get them out of the parental home, others to set them up financially, however it is very common in Australia. In fact, over 54% of first home buyers in Australia rely on their parents to help them buy their first home.
So if you are one of the many parents looking to help your children get into their first home, we have prepared a list of the most common options on how you can get started.
This one might not be possible for all parents — after all, your children might be grown up now. However, if you can, putting aside a little bit of money for your child as they grow up can be a massive help. If you put away just $50 a month for 18 years, there will be $10,800 sitting in an account (not including interest!) that can help your child get a head start on saving. After all, $10,000 is half of a deposit in some cases, which will take a lot of stress off the kids backs.
Investment Bonds are a great vehicle for potentially both creating a saving fund for your child to use a property, and for getting a nice tax deduction for yourself. More common in the USA, they are available in Australia and worth considering if you are in a higher tax bracket and have time to build the saving amount required for a deposit. More information is available on the ASIC website here and you should get professional advice as Investment Bonds can have tax and estate planning implications
Another thing you can do is teach your children about saving and the house buying/mortgage process. Buying property is a confusing process when you go to do it for the first time, so give your kids a head start by including them a little when/if you buy a new home or investment property. Even just a basic understanding can help them further down the line.
It might feel like this is one that’s self-apparent, but it’s worth pointing out. Help your child when they want to buy their first home; go to open homes with them and point out the little details that they might not know to check, or talk to them about the mortgage process. This is important because it can prevent them from making costly mistakes, or forgetting to take care of a detail that could mean they lose out on an offer later down the line. Those of you who have bought and sold many homes may take the process for granted, but do not underestimate how daunting buying a first home is for most people.
Your help can also extend to packing up their apartment when they move, or ensuring they have a good financial advisor on hand. After all, very few people know your children as well as you do, so you can help them understand that maybe they shouldn’t take out a loan that big because they still haven’t paid you back for that car you bought them way back when.
If you decide to loan your child the money they need, you need to ensure they’ll pay you back. A common strategy to protect your financial assistance is to document it as a family loan agreement. This can provide numerous benefits including:
Where asset protection is paramount, properly drafted legal documentation is key. In most cases, a DIY family loan agreement could be seen as a ‘sham arrangement’ – more accurately characterised as a gift. While it is tempting to try to save money by drafting your own agreement, given these stakes, you should seek financial and legal advice to keep your child (and you) safe.
You don’t have to give your children money to help them buy their first home, but most first-timers still need to show the bank that they can service the loan they will be taking out. That’s where you can come in. Up to 21% of first home buyers have a guarantor, as it gives lenders a greater sense of security and can decrease the amount that has to be paid back in the mortgage.
Of course, there are risks associated with using the family home as a guarantor. If your child defaults on their loan, you are responsible, so it’s important that you sit down and discuss everything in great detail. Talk about what might happen if they get sick or injured and can’t work, and how their plans for the future and your plans will need to potentially intersect — you get the idea. Understanding the loan structure and your obligations is key to making this work.
Parents can consider buying a property with their children and share the burden of repaying the loan. This is another options where you’ll need to sit them down and have a good, long chat about absolutely everything to ensure it’s the right decision. Like a business partnership, a plan should be agreed on and documented. We’d recommend getting some proper documentation together, because plans change and you don’t want to be caught out if they want to leverage the equity in the property to buy an investment home (or the other way around!).
One really interesting model that is being pursued by some innovative commercial investors which applies very well to a parent – child model is the shared capital growth model. A partnership is set up where the parents can invest the deposit and the child pays the mortgage and covers all ongoing costs. Then the capital gain is shared 50 / 50 at some stage in the future. It can provide an acceptable capital return for the parents whilst getting the child into the market and likewise, helping them to build enough equity to eventually be able to own their own place.
Some parents may decide to gift their children with the money (or property) they need, rather than pay the costs directly. This is a good option because there is no gift tax levied on money gifted purely with the desire to help someone. The Department of Human Services describes gifting as “giving away assets or transferring them for less than their market value”. This can, therefore, include:
If your child is receiving a social security benefit from the government (or you are), then you can only give up up $10,000 in cash gifts or assets each financial year, and this is limited to $30,000 over five consecutive financial years. If you gift more than this, Centrelink considers the excess a ‘deprived asset’, meaning they’ll reassess the amount of money you are receiving from them (this includes payments like the pension).
The biggest issue here is considering how gifting the money will affect your financial position. Don’t put yourself out so your children can buy; property moves in cycles so it might be worth waiting a few years until they can afford to buy by themselves.
Also remember that you will be gifting your child the money, even though it may be invested into an asset (the property) that could be in multiple persons names eg a partner or spouse. If the property is purchased in both names as joint tenants, when it is sold any capital gain will be distributed according to the ownership interest, irrespective of the amount each partner has contributed by way of deposit. If one party, your child, is contributing the total deposit or majority of the deposit, a loan agreement between the two owners should be created or perhaps an ownership structure as tenants in common with a % split reflecting the different contributions should be considered.
You might decide to buy the home and then let your child live there while they pay you back. If you do this, make sure you have official documentation drawn up so that everyone involved knows what’s happening. After all, they might not have a ‘proper’ mortgage, but your son/daughter does have to pay you back because the Bank of Mum and Dad™ shouldn’t be a bottomless pit.
It can be a rewarding experience to help your child buy their first home, but you want to ensure that you don’t put yourself into a precarious financial position as you near retirement. Even if you can’t financially support your child, the emotional support and guidance you can provide is priceless, and something they’ll appreciate down the line because it can save you (and them) money and time.