With over 30% “‘of adult children still living at home it’s no wonder parents may have to consider working until they are 70!
The challenge of home ownership for young Australians is an enormous issue. However the consequences for parents are just as concerning. Studies show 46% of parents were happy to relinquish their empty-nest lifestyle and let children live at home longer if it meant children could save more money for a home deposit. In many instances this means parents have to re-direct some of their discretionary spending take less expensive holidays, defer purchases and work longer simply to cope with the financial responsibility of having the children live at home.
Parents need to consider the hidden costs associated with this option and the potential consequences on their future retirement lifestyle. So what are some of the solutions and the pros and cons that come with it? Let’s take a closer look at these options from both sides.
Gifts Parents can contribute financially to the deposit of a home for their children by providing the children with a lump sum of money.
- Children can accumulate a larger deposit in a shorter period.
- Children can buy into the property market sooner.
- A gift is NOT repayable.
- Lenders may require parents to declare there is no requirement for these funds to be repaid.
Supplemental loans Parents can provide a supplemental loan to their children with the intention that they repay. Some parents provide these additional finances with no interest.
- Provides children early entry into the property market.
- Reduces their interest charges. Cons
- The loan and its terms should be documented between the parties.
- Parents can register the loan against the title of the child’s home providing additional security.
- If things go wrong, the bank requires payment first. Avoid future disappointment by documenting the terms of the loan, the repayment timeframe and responsibilities.
Invest in the property with your children In this scenario, it is common practice for the parties to be ‘tenants in common’ rather than ‘joint tenants’ This also allows a different ownership ratio to the normal 50/50 and an alternative ownership split that may not impact their FHOG entitlement. For example, the children may purchase 75% of the property and the parents purchase 25%.
- Allows children to get into the market sooner.
- Children purchase a portion of the property now with a view to buy out the parents over time (usually at current market rate).
- Children can purchase incremental portions as they can afford to.
- Parents have the benefit of having an investment property (or a portion) bringing them tax advantages, rental income and potential capital gain when they sell their portion at a later date.
- The children can’t afford to buy out the parent.
- Relationship breakdowns may force one party to sell earlier than expected and wear the associated costs of an early sale.
- Children can’t afford to pay the market rent to the parents as part of the deal.
Acting as a guarantor, some lending institutions have what is known as a Family Pledge. This enables family members with equity in their own property to help their children with additional security, thereby allowing the child to borrow up to the full cost of the home.
- Aimed at home buyers and property investors who have the ability to repay the loan but lack sufficient funds to meet both the deposit and associated initial costs.
- When sufficient equity and mortgage repayments have been made, the child may be able to redraw on the loan or refinance to repay the parent.
- Some lending institutions allow the guarantor to nominate the specific amount to which the guarantee is limited.
- If children can’t meet mortgage repayments, guarantors will be required to make those repayments on their behalf.
Regardless of the option best suited for you and your children, all family finance lending arrangements should always be documented for clarity, security and peace of mind. When considering helping their children, parents need to understand possible consequences on their own retirement planning. These can be just as important as the children getting a foot in the property door. If you would like more information on the options available to you to help your children get a head start in the property market, while protecting your own interests, please contact the office for a confidential discussion.