Helping your children buy a home

With rises in the property market, first home buyers being unable to afford the purchase of a home without assistance is becoming an all-too-common occurrence.  As a result, we are seeing an increase in parents assisting their children with the purchase of their first property.  This assistance primarily takes the form of parents gifting a sum of cash to their children or signing as a guarantor.

While gifting money may seem like the easiest and most straightforward option, loaning as opposed to gifting these funds can provide both you and your child with increased legal and financial benefits.

Financial Implications of Gifting

Many clients who discuss their desire to gift money to their children to assist with purchasing their first home are often surprised when we raise the impacts that may have on their current or future aged pension.

Under the current gifting rules, Centrelink permits up to $10,000.00 per year or $30,000.00 over a five year period to be gifted without including these amounts in any means test for the purposes of aged pension assessments.  Any amounts gifted that exceed these limits may be regarded by Centrelink as ‘assets’ for the purpose of means testing.  For example, a client may wish to assist one or more of their children by gifting them $60,000.00, being the value of a 5% deposit for the purchase of a $1.2 million home (the median house price in Helensburgh).  On this basis, these funds may still be regarded by Centrelink as assets of the parents in their means-tested assessment.

Protecting the Money in case of Divorce

If your child is in a relationship or gets married, a formal loan can protect any amounts paid by you from being divided as part of a family law property settlement.  On the other hand, gifting these funds to your child increases the likelihood of these funds being treated as part of your child’s joint assets and divided in a divorce settlement.

In order to best protect these funds in the event of a family law property settlement, a proper deed of loan should be executed by the parties, which includes an obligation to repay the funds, interest and other essential terms prior to the funds being loaned.

Guarantor Loans

Signing on as a guarantor is another way to help your child by offering your own home or assets as security. However, it’s important to consider that this option makes you legally liable for the loan, meaning if your child fails to make payments, the lender may sell your home. Additionally, signing on as a guarantor can affect your future borrowing power.

It is important to consider the various factors involved with helping your child purchase their first home to best protect yourself and your child in the future.

If you’re considering a loan for your child or unsure where to start, book a Free 15 – Minute Discovery Call with our Business and Estates team today.