HELPING YOUR KIDS INTO PROPERTY
One in three first home buyers are stuck saving for a deposit for over five years. With one third of young Australians taking more than five years to save for a deposit on their first home, there are plenty of ways you can help your kids get into the property market sooner.
The most common ways to help kids acquire a property include:
As a parent, you may feel inclined to help your children financially, but not all assistance has to come in the form of a cash handout. Other ways to help could include:
• Teach good budgeting and savings habits
Teaching your children things like how to budget and save, how interest rates work, the consequences of unsustainable debt and the benefits of an emergency fund could go a long way.
• Suggest your kids look into their credit record
A tarnished credit report could affect your children’s ability to get approval on a loan.
• Let them live under your roof while they save
Due to factors such as the increased cost of living and housing affordability issues, nearly one in four people aged 20 to 34 receive financial support by living at home.
• Get them up to speed with the real cost of buying property
This may involve government fees, insurance and interest charges. Your kids could also save a significant amount of money over the long term by understanding types of home loans, comparison rates and key considerations should they buy an investment property.
• Help them explore government assistance options
The First Home Owner Grant is a national scheme funded by Australian states and territories. If your children are unsure about eligibility, contact your State Revenue Office.
As house prices throughout Australia continue to rise, many parents are helping their children get into the property market. You may be able to help yours by:
• encouraging good money habits
Get your children to start saving early with the help of a budget planner or first home saver account.
• contributing financially
You may be able to gift money for a deposit or sign the home loan agreement as a co-borrower
• using the equity in your own home
Some lenders will allow you to use your own home if you want to act as the guarantor on your child’s loan or provide a family pledge
• educating your children
Help your kids understand all that’s involved in preparing to buy a property.
Parents want the best for their children and while the idea of helping children into the property market can be appealing and may work well for your family, there may be risks for you and your children as situations change.
It’s important to think as far ahead as possible and speak with a financial adviser about the possible consequences before helping your children.
Financial ways you can help
Lenders will generally ask for a minimum deposit of between 10% and 20%. Some lenders may offer your children finance without this if a family member pays the deposit, signs as guarantor or buys the property as a co-owner or joint borrower. Here are some details on these options:
• Gifting the deposit
If you can afford it, gifting a deposit can be a great start. A good deposit will reduce the amount your child needs to borrow, and the interest paid over the life of their loan.
When it comes to gifting property as a way of helping your children, there are several options. You can provide money for a deposit or part-pay a loan.
If you gift a deposit to your children, there may be impacts to your Centrelink benefits—the Department of Human Services has more information about the impact of gifting on your benefits.
There are options for buying property in a child’s name too, but it’s a complex topic. If you’re considering buying a property in your child’s name, its recommended that you seek specific legal advice from a specialist in this area.
• Lending the deposit
If there is any risk of your child’s marriage failing or your child is in business, it may be better to lend the money to them. This is best done by gifting the money to a discretionary trust and then the trust lends the money. It is best if the trust can secure the loan by way of a mortgage on the title. This way the money is secured.
• Signing as a guarantor
Some lenders allow you to use the equity in your home as additional security for a loan taken out by your child.
It’s essentially a promise by you to the lender that your child will abide by their responsibilities as a borrower. And, if they don’t or are unable to, that you will repay the loan for them.
Going guarantor requires a lot of thought because if things don’t go to plan, the loan becomes your responsibility and you may have to sell your own home in the process to clear your child’s debt. This gives children the benefit of buying a property before they’ve saved the full deposit they’d otherwise need.
The property to be purchased will normally be used as the main security for the loan and the guarantor’s property provides extra security. The extra security can generally be your own home or an investment property―the property may or may not have an existing mortgage in place. Some lenders offer to limit the guarantee a parent provides and the guarantee may be removable down the track once the child’s loan has been reduced below a certain level.
Before acting as a guarantor, you need to make sure the property being purchased is a valid investment because you may have to repay the loan or meet any shortfall in the event of the property’s sale.
And your own home would be at risk if for example, your child failed to meet their obligations under the loan agreement.
• Going in as a joint borrower
If you sign as a joint borrower, you’re equally responsible for the home loan and must repay the entire debt with the principal borrower—your child—whether they default or not.
This is also a big commitment and you’ll need to understand the risks and get the right advice.
When you buy a home with your kids you share responsibility for the costs involved while receiving the benefits of investing in property.
It’s important to understand that as a co-owner you are included on the loan and are responsible for the entire debt until it is repaid.
So that means even though as a co-owner you’d technically own only half of the property, if your child failed to pay their part you could be responsible for repaying the entire loan.
• Acquiring the property in a unit trust
Another option is to acquire the property on terms of a unit trust.
The children own units and the parents own units. The children would be the trustees. Consideration needs to be given in relation to land tax and capital gains tax but if structured correctly these taxes can be minimised.
Next Step
If you’re going to give money to your children, it may be a good idea to discuss early on how and when the money will be provided, and when and if you want the money back. Likewise, if you’re providing non-financial support, make it clear on what terms support will be provided.
Having an agreement in place can go a long way to ensuring everyone is on the same page and you may even consider writing down what you’ve agreed to so there are ground rules in place. Meanwhile, if the support you plan to provide will be financial, you may want to speak to your adviser so you’re aware of the risks, benefits and any tax implications.
The next generation of home buyers should be realistic about the length of time it takes to save a deposit as well as the financial commitment required to hold and maintain a property.