Are you thinking of helping your children buy property?
16 May 2013
With ever increasing property prices in Sydney, a question I am hearing more and more often from my clients is "how can I help my children buy property?".
There are many ways to go about this, and each family's situation will dictate what the best approach is.
In order to secure a loan to purchase a property, your children 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 I have seen in providing this assistance, along with the some of the pitfalls to be wary of:-
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 then 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.
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.
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 retiree parents with their children looking to purchase;
- What happens when the parents want to move house? The loan security would usually be moved to your next home. In my experience, the timing of children purchasing their first home often coincides with parents 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.
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 the estate planning arrangements need to be reviewed. I suggest you seek some advice from a qualified professional.
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