11
A HELPING HAND FROM PARENTS
Parents want to assist their children to
achieve the great Australian dream of home
ownership. It is reported that 8 in 10 parents
are prepared to lend a hand by providing
some form of financial support in an effort to
help their children enter the property market.
This financial support may be in the form of:
•
gifting at least part of the deposit to their
children,
•
providing a supplementary loan in
addition to the bank loan, typically
interest free, or
•
acting as guarantor.
Gifted deposits
Parents providing assistance with the deposit
must be aware that a gift is not repayable. The
majority of lending institutions will require
parents to declare that the funds they have
provided are a non refundable gift.
Supplemental loan
Parents who have available finances today,
but with future needs, may want to consider
providing a supplemental loan to their
children, potentially with low or no interest.
It is strongly recommended that this type of
loan and its terms be documented between
the parties. Remember, parents may have a
good relationship with their children and their
children’s partners now, but who knows what
might happen in the future?
As an alternative to providing a loan, parents
can choose to buy the home with their
children, allowing them to enter the housing
market and providing the parent with an
investment property. In this scenario, it is a
more common practice for the parties to be
“tenants in common” rather than “joint tenants”
and also allowing a different ownership ratio
to the normal 50/50. However, with part
ownership the child will not qualify for the
First Home Owner Grant.
Acting as guarantor
Some lending institutions have what is called
a Family Pledge. This allows family members
with equity in their own property to help
their children/grandchildren/siblings with
additional security, thereby allowing them to
borrow up to the full cost of the home. Some
lending institutions allow the guarantor to
nominate the specific amount to which the
guarantee is limited rather than a traditional
open guarantee for the entire amount. The
guarantors are usually recommended or
required to gain legal and financial advice
in order for the lender to proceed with the
guarantor’s loan.
Please call
for more
information
on these
topics.
Parentsnowwant toassist their
children toachieve thegreat
Australiandreamofhomeownership.
It is reportedthat8 in10parentsare
prepared to lendahandbyproviding
some formoffinancial support inan
effort tohelp theirchildrenenter the
propertymarket.
Thisfinancialsupportmaybe in
the formof:
•
Letting the kids liveathome
longer, inmany instances
rent free,
•
Giftingat leastpartof the
deposit to theirchildren,
•
Providinga supplementary
loan inaddition to thebank
loan, typically interest free,and
•
Actingasguarantor (although
thedrawbacksneed tobe
consideredhere).
KidsLivingatHome
A reporthas found46percentof
parentswerehappy to relinquish
their
empty-nest lifestyleand let the
children liveathome longer if it
meant thechildrencould savemore
money forahomedeposit. Inmany
instances thismeant theparentshad
to redirect someof theirdiscretionary
spending, take lessexpensive
holidaysanddeferpurchases tocope
with thefinancial responsibilityof
having thechildren liveathome.
Parentsneed toconsider thehidden
costsassociatedwith thisoption
and thepotentialunintended
consequences itmayhaveon their
future retirement lifestyle.
GiftedDeposits
Parentsprovidingassistancewith the
depositmustbeaware thatagift is
not repayable.Themajorityofbanks
will requireparents todeclare that
there isnoneed for these funds tobe
repaid.
SupplementalLoan
Parentswhohaveavailablefinances
todaybutwith futureneedsmay
want toconsiderprovidinga
supplemental loan to theirchildren,
potentiallywith loworno interest.
‘
8 in10parentsare
prepared to lendahand
byprovidingsome form
offinancialsupport
’
Formany, thefinancialhelp isan
informalarrangement,but there
aremanypotential risksassociated
withnothaving theappropriate
documentation.Accordingly,asa
minimum, the loanand its terms
shouldbedocumentedbetween
theparties. Ifaparent requires
additional security theymaywish to
register the loanagainst the titleof
thechild’shome. It is important to
beaware that in theeventof things
goingwrong, thebank requires
paymentfirst.Remember,parents
mayhaveagood relationshipwith
theirchildrenand theirchildren’s
partnersnow,butwho knowswhat
mighthappen in the future?
Asanalternative toprovidinga loan,
parentscanchoose tobuy thehome
with theirchildren,allowing the
child toenter thehousingmarket
andproviding theparentwithan
investmentproperty. In this scenario,
it isamorecommonpractice for the
parties tobe“tenants incommon”
rather than“joint tenants”.Thiswill
alsoallowadifferentownership ratio
to thenormal50/50andprovidean
alternativeownership split thatmay
not impact theirFHOGentitlement.
ActingasGuarantor
Some lending institutionshavewhat’s
calledaFamilyPledge.Thisenables
familymemberswithequity in their
ownproperty tohelp theirchildren
withadditional security, thereby
allowing thechild toborrowup to
the fullcostof thehome. It’saimedat
bothhomebuyersand investorswho
have theability to repay the loanbut
lack sufficient funds tomeetboth the
requireddepositand theassociated
costs.Ata later stage,when sufficient
equityand repaymentshavebeen
made, thechildmaybeable to
redrawon the loanor re-finance to
repay theparent.
Some lending institutionsallow the
guarantor tonominate the specific
amount towhich theguarantee is
limited, rather thana traditionalopen
guarantee for theentireamount.
Regardlessofwhichoption isbest
foryou,all familyfinance scenarios
shouldbeconsideredwith lending
arrangementsalwaysbeing
documented forclarity, securityand
peaceofmind.
Parentshelpyourkids!
