Property prices are soaring across Australia, with the national median house price hovering well above $600,000.[1] A recent MLC survey showed that almost two-thirds of Australians believe the next generation will never be able to afford their own home.[2]
So you may be thinking about how you can give your kids a helping hand when it comes to getting a foothold in the property market. The good news is you have a few options. However in all situations you need to consider the impact on your circumstances to make sure it is the right decision for yourself not just the children.
Option 1: Pitch in cash
Pros: The most challenging aspect of buying a house is saving the 20% of the purchase price you usually need for a deposit. If you have enough cash, you could help out your child by giving or lending them the deposit funds.
Cons: If your child gets divorced or passes away, the cash you’ve donated, or property they’ve bought, may end up in someone else’s hands. If you are receiving income support payments from the Government, you would need to understand any impact that this would have on your entitlements.[3]
Option 2: Buy a house for them
Pros: By purchasing a house in your own name, you’ll keep control over the property, and protect your investment in case of a divorce. Your child can then live in the house as a tenant.
Cons: At some point, you may wish for ownership of the house to be transferred into the name of your son or daughter to ensure their rights to their home after you die. When this transfer happens, you may need to pay Capital Gains Tax on the increase in market value of the property. You may also need to think about who will fund any Stamp Duty payable, as well as other expenses which may apply such as Land Tax, and solicitors’ fees.
If you’re receiving income support payments from the Government, you would need to understand any impact that this would have on your entitlements.[4]
Option 3: Become a guarantor
Pros: By using the equity in your own home as security for your child’s mortgage, you can enable them to borrow a higher amount and potentially reduce the amount they need for a deposit. What’s more, you may also be saving them thousands on Lenders’ Mortgage Insurance.
Cons: If your child is unable to make their loan repayments, you’re responsible for the loan, and could end up in financial strife as a result. There may also be other important considerations, including:
- The impact of the guarantor arrangement on the ability for you to sell your own home
- How you’ll provide similar support to your other children if you so desire (sometimes there are restrictions on how many guarantor arrangements your home equity can support)
- If there’s a default, and you’re receiving a Centrelink benefit, there may be an impact to your entitlements.[5]
If you’re thinking about this type of arrangement, it is important that you speak directly with the lender to fully understand the implications for you, and to also understand what could happen if things go wrong.
So think carefully about how you would manage if this happens, and make sure your child understands their responsibilities before you put your own home on the line.
Option 4: Buy property together
Pros: When you go into a joint venture, you and your child become co-owners of the house. This allows you to maintain some control of the future of the property while splitting the responsibilities of mortgage repayments and upkeep – potentially making it more affordable for both you and your child. Down the track, your son or daughter may be able to buy out your share of the property and become independent homeowners.
Cons: It can be difficult to anticipate possible future disagreements about the way the home is used, or who takes care of repairs, maintenance and bills. It’s also difficult to know what might happen in the future that could influence either yours or your child’s capacity to keep up with repayments and other ongoing expenses. Life is forever changing, and we don’t know what the future holds for us financially or in relation to our preferred lifestyles, so it’s important to understand that this kind of arrangement can be tricky and costly to get out of if it’s no longer suitable.
It’s important to get legal advice before you enter in to this kind of arrangement, so that you understand and are prepared for what will happen if your child gets married, divorced or passes away.
You may also need to pay Capital Gains Tax, Stamp Duty, Land Tax and other fees and levies if and when you sell your share of the property, and again, if you’re receiving any social security benefits, it is important to understand how transferring the property to your child will impact your payments.[6]
Get professional advice
Everyone’s situation is different so it can be hard to know what the right option is for you and your family. That’s why getting financial advice can make all the difference, so you can be sure you’re doing the right thing by your children.
[1] Domain House Pricing Report, June 2015
[2] MLC, Australia today: A look at lifestyle, financial security and retirement in Australia, 2016
[3] If you receive Centrelink or DVA benefits, and you gift or loan money or other assets to another individual, it is important to understand how this might impact your payment. You should contact social security directly or speak to your financial adviser.
[4] Generally, while you own the dwelling, it is assessed as your asset. If however you transfer title to your child in the future, or you sell it to your child for less than market value, you may be assessed as having ‘gifted’ the property to your child. See footnote 3 above for more information.
[5] This is complex. If you are receiving any beneifts from Centrelink/DVA you should speak with them directly, or talk to your financial planner to understand how this may impact you.
[6] Generally, while you own part of the dwelling, it is assessed partially as your asset. If however you transfer title to your child in the future, or you sell it to your child for less than market value, you may be assessed as having ‘gifted’ the property to your child. See footnote 3 above for more information.