help your children to buy property

How to help your children to buy property in Australia

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Do you want to help your children to buy property in Australia?

The dream of home ownership is still alive and kicking here in Australia but unfortunately due to high property prices a lot of young people are shying away from actually buying a house.

The recent downtrend in property prices thanks to Rising interest rates may have sparked a little bit more interest in the sector but unfortunately a lot of it has been offset with the additional cost to service loans.

Thanks to those Rising rates this has caused a lot of young people to look to their parents for guidance and financial assistance.

When it comes to buying their first home and naturally as parents they tend to want to do what’s best for their children and so they’re looking for ways that they can help out.

So in this article we’re going to talk about a number of the ways or number of the methods that parents can help their children financially to buy a house and we’re going to go over the pros and the cons of each method.

Only Help Out Financially

I just want to tell you what I tell a lot of my clients and that is only help out financially if you are in a position to do so and you can think of it a little bit.

Like when you get on a plane the flight attendant will tell you that in the events of an emergency put your own oxygen mask on first before helping others and the same rule applies with your finances.

You need to get your own Financial house in order before you can go out and help others and as a parent you’ve already given your children life you’ve given them the best upbring you can you’ve given them love affection nurture all those things and that is the important thing of a parent.

On top of that really is just a bonus but with that being said let’s go to next point.

Gifting Money

Jump in the easiest way to help your children to buy property is to give them some money this is going to give them a much bigger deposit than they would have otherwise had.

When it comes to buying a house and this applies to everyone it’s ideal to have a minimum 20% deposit plus cost.

At this level lenders basically see you as a low risk client and as a result you’re going to get a better interest rate and you’re not going to pay lenders mortgage insurance.

Now there are other ways to get around LMI which we will touch on a little bit later.

By gifting your children money they’re going to get closer to or even exceed that 20% ideal deposit and this will also mean that their loan balance is smaller which means that their ongoing repayments are going to be less.

Just be aware though that most lenders won’t treat the gift as genuine savings unless it’s been in the child’s account for at least three months

There are no tax implications on gifting money you’re free to gift money tax free so there’s no tax payable by your children you do have to be aware though that there could be some sensling implications.

If you’re receiving a government pension like the age pension or the disability support pension then the gifted money can be treated as an asset under the assets test for up to five years.

So out of the current rules you can gift $10,000 per Financial year or $30,000 over five Financial years anything in excess of this is gonna still count as an asset for five years.

Another key risk of gifts is that if your child is buying with another person so a spouse and they were to separate well then that gift is probably going to form part of the asset pool in the event of Separation.

Now to get around this some parents prefer to go under a loan Arrangement rather than a gift. So let’s talk about that now.

Loan Arrangement

If you want your Child to pay back the money that you have given them or if you want to protect the money in the event of Separation then you can consider a loan Arrangement.

Under a loan Arrangement there is an expectation that the money you give to your child will will be paid back at some point.

With a loan Arrangement the terms need to be specified in a written document now you can basically make the terms anything you want but I would suggest contacting or getting a lawyer involved just to make sure that you’ve ticked all the boxes and it is a somewhat binding agreement.

So then in the event of Separation The Loan would be considered a liability under family law proceedings and the amount will be payable in full back to the parents.

Just be aware though that if you do loan money to your children as opposed to giving it as a gift then the banks will also consider this alone and they’re going to factor it into your child service ability meaning that they can borrow less.

Now if you’re loaning money simply because the banks won’t lend enough to your children this is obviously not going to help but you need to sit back and ask yourself Is it wise for you anyway to be helping your children get into that much debt the same sensling and genuine savings issues which we discussed in Gifting Money Also apply to Loaning money.

Guarantor Arrangement

Under a Guarantor Arrangement you’re putting up assets as security for your child’s loan and what this is going to do is it means that it’s less risk from the bank’s perspective.

So your child is going to be able to buy a house with a smaller deposit not pay lenders mortgage insurance and also get a better interest rate.

Upside

And one of the most beneficial things about a guarantor Arrangement is that you don’t have to put up any cash all you’re doing is you’re putting up an asset as security you wait for your child’s loan to drop below the 80% loan to value ratio and then you request to have your guarantee removed.

Downside

The downside is that if things go wrong in this Arrangement the consequences can be quite substantial if your child defaults in their repayments in the first instance the lender is going to sell their house and that is not enough money in order to pay out the loan then they’re going to look to sell potentially sell your asset as well to recoup the difference.

So given the seriousness of these consequences I would only recommend going guarantor if

1. you’re confident in your child’s ability to handle money and make their payments.

2. your child has the appropriate insurances in place if things were to go wrong so life insurance tpd income protection trauma and

3. I personally would only go guarantor if I had enough cash sitting there where if there was a default and they were looking for the guarantor for the remainder or to make up the shortfall that instead of selling my asset I could simply give the lender the cash.

Joint Tenants

To make up the difference some parents choose to Joint Tenants buy a portion of the house so their children are going to live in and they can do this as joint tenants or tenants in common.

Joint Tenants

The primary difference between these two different ownership structures is that as joint owners it’s always going to be an equal share of the property so it’s always going to be 50-50.

And in the event one party were to pass away the ownership is automatically going to revert to the surviving person it doesn’t actually form part of the estate.

Tenants In Common

Whereas under a tenants in common Arrangement the ownership split can be anything you want so it can be 50-50, 90-10, 60-40, 70-30 whatever you want and in the event you would have pass away the ownership or your share of the ownership does form part of your estate and it’s distributed in accordance with your will.

Benifits Of Buying Property Together

The benefit of buying a property together is that you’re keeping an asset on your balance sheet and it’s an asset that does have the ability to grow in value over time.

You can enter into this agreement with the intention that your child buys you out in the future when they’re more financially capable to do so you can both agree to sell the property and split the proceeds or maybe you just want to give them your share of the property as part of their inheritance.

Whatever you decide to do or whatever the arrangement is I would suggest speaking with a lawyer and getting a co-ownership agreement drafted just so the terms are clear.

One thing to be very careful about here is that both parties are going to be liable for the full loan amount so you want to make sure that your child is good with money can meet their repayments and of course you also want to make sure again that they have the appropriate insurances in place.

Also be aware that if you plan to gift or sell your portion of the property to your child at a later date there’s going to be capital gains tax issues and stamp Duty issues that you need to consider you also need to be aware that your child’s access to first home buyer benefits could be impacted so you should contact your local state government about this prior to doing anything.

Personally I don’t like buying assets with anyone other than a spouse and the reason is because you may be very close with your children but inevitably your financial lives are going to go in very different paths.

You’re on different trajectories and so I would really only consider this strategy if it’s money that I didn’t need in my personal situation.

Buy Through A Family Trust

I deliberated that whether or not I should include this one here because buying a property through a Family Trust is not really helping your child buy property.

Because it’s going to be the trustee of the family trust that owns the property you could then decide to let your children stay in the property at the trustees discretion this could be on a rent-free basis or it could be with some form of rent payable.

The benefit of this approach is that as a trustee or the director of the corporate trustee you’re going to maintain full control over their asset in the event that you were to pass away well then the trust deed is going to dictate what happens to the trust.

So ownership can be potentially passed to your children which means that the property can be retained and owned by the trust without paying any capital gains tax or stamp Duty.

Downside

A key downside to this strategy is that if you do want this property to be your child’s principal residence well then normally a principal residence is best owned in personal names and the reason is because a principal residence gets the capital gains tax exemption.

Also if you intend to eventually transfer ownership to them so out of the Family Trust into their personal names there’s going to be capital gains tax and stamp Duty implications of doing so.

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Conclusion

So we’ve gone over a number of ways that you can help your children financially to get into the property market.

And we’ve covered off some of the pros and cons of each if you are considering any of these methods I would recommend that you do further research and also seek the professional advice that you need.

In my opinion one of the best things that you can can do for your children is to teach them how to build their own wealth and buy their own house.

All of these things that we discuss today are good and they can help financially but nothing beats good old-fashioned Financial education.

And it’s like the old saying you know you can teach you can give your children a fish or you can teach them to fish.

And if you’re not very good at teaching them how to fish financially then you always have the option to put them onto someone like a financial advisor who can do that aspect of it.

And i am giving a link here where you can search for Real Estate

But that’s it for me today guys thanks a lot for staying till here, I hope you found this article helpful if it is then please Rate our post and leave a comment below if you have any issue regarding this article.

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