In addition to being considered tech savvy, one characteristic that has defined Generation Y is their bond to the family home.
There are good reasons to stay at home, including rental/housing affordability and studying for a tertiary education. Financial concerns however are cited as the most common reason for staying at home.
Today the average house price in Australia is 9.3 times higher than the average national wage. Compared with just 5.8 times higher 40 years ago, this makes it that much tougher for home ownership to occur as easily as it did for Gen Y’s baby-boomer parents.
So how can you overcome this financial hurdle to help your children leave the family home?
There are many ways to go about this, and each family’s situation will dictate what the best approach is. In order for your children to secure a loan to purchase a property they will need to satisfy the bank in relation to:
- Their income by being able to service the loan and its interest payments.
- Their assets by having a substantial deposit – at least 20% to avoid costly mortgage insurance.
The following is a list of some of the more common approaches seen in providing assistance, along with the some of the pitfalls of which to be aware:
1. Gift an amount
This is typically the most common approach – to simply give your children a capital sum. This is certainly the most simple way to go, however once the money has been given, you cannot get it back. This can cause problems:
- Should you find yourself in financial trouble. You have no legal recourse to ask for some or all of the money back.
- If your child is in a relationship (married or defacto) which breaks down. Your child’s partner may end up walking away with a substantial amount of the gift.
- There is the risk that if your child is taken to court for any reason, the gift could be at risk to creditors or litigants.
2. Loan monies
Rather than simply gifting money, you have a loan agreement drawn up, such that if any of the above issues arise, you may be able to call in the loan to protect the gift. Unfortunately, this strategy is not as simple as it seems:
- The courts are smart. They will see through any “contrived” loan arrangements. For example if your child is not paying interest on the loan, is it really a loan?
- A possible solution to the above is to perhaps declare an interest rate but allow it to capitalise so that physical payments are not made.
- You may need to consider a registered mortgage to provide adequate protection. Your children however may then need to disclose your loan in their bank loan application which may defeat the original purpose.
3. Guarantee using property as security
Assuming you own your home or other residential property, you could simply allow your children to use your property as part of the security for their purchase. Again, a couple of points to note:
- Under such a scenario, banks will often want to ensure that you as the parent will be able to service the loan should your children be unable to. This can often be an issue for retired parents whose children are looking to purchase.
- What happens when you want to move house? The loan security would usually be moved to your next home which often coincides with downsizing from the family home.
- Be aware that many retirement villages are structured as a leasehold rather than strata purchase, which means the bank may not be able to use the retirement village as security for a loan.
4. Joint purchase
Physically purchase the property partly in your name and partly in your children’s name. This probably provides the highest level of protection should something go wrong, however it can also have the highest level of cost since:
- Your children may not be eligible to any first homeowner benefits.
- Assuming you intend to transfer your share to your children at a later date, you will be liable for capital gains tax and your children may have to pay stamp duty on the partial transfer.
Whichever strategy you choose depends on what you are ultimately trying to achieve. If you simply want to help your children purchase property, a simple gift may work best. However, you need to be aware that there are many other issues to consider such as whether your estate planning arrangements need to be reviewed.
Always seek advice from your OBT Financial Advisor to understand the options available to you when considering helping your children purchase a property on 07 5462 2277.