Giving the kids a leg up into the property market is becoming more common in Australia as children struggle to come up with deposits amid rising house prices. Indeed, parents who can afford to are nowadays almost expected to shell out to help their kids buy a house. While it certainly won’t be possible for everyone, if parents are lucky enough to be in a position where they can lend a helping hand to their children, they need to ensure they are not wasting their financial help, and that their married children don’t end up risking losing half the parental assistance to their ex in a divorce settlement. So what are the ways that parents can help their children enter the property market–and which methods carry the least risk?
- Parents acting as guarantor using their home as collateral
Research shows that this is increasingly being considered as an option in families. This method avoids parents having to hand over actual cash while enabling the child to avoid the tedious and often difficult process of saving a deposit, or having to cough up lenders mortgage insurance which can be costly. However, the first-time property owning child still has to prove to a lender that they will be able to service the debt. Also, using the parents’ own property as collateral carries obvious risks–if the child defaults on the loan, the parents as guarantors are responsible. How much equity the parents will need to have in order to act as guarantor depends on the lender and on the particular circumstances. If going down this path, it’s important that everyone is clear about how potential future situations (such as the child’s job loss or illness) will be handled and to have a plan of attack in place for unforeseen situations to avoid defaults.
- Buying in partnership
Another option is to buy property together with the child in order to share the debt burden. Partnerships also come with risks though, particularly if the child has a partner who may have his or her own ideas about finances, whether that means they wish to leverage the equity in the property to buy investment properties, or to use equity in some other way, for example to go on a holiday.
- Buy property in the parents’ name or through a trust
To retain control, parents often prefer to keep the child’s property purchase in the parents’ name or that of a trust. However, at some point in time, the property will need to be transferred into the child’s name, whether on the death of the parents or if the title of the property is transferred to them. Although buying property in this way may protect the parents’ investment in case of a child’s divorce or separation, there may be tax consequences when the house is transferred to the child either upon death or transfer of title.
- A cash gift for a deposit
The simplest method for how parents can help children enter the property market, whether they extend the amount of the deposit or (for some lucky children), the entire purchase price of the property. However, giving a gift can mean wealth is transferred out of the family if the child gets a divorce. A parent’s gift to their child (whether cash or property) is an asset that is listed on the divorcing child’s balance sheet and can be carved up by the family courts in a property settlement.
Further, the child needs a good, stable income to service the loan but also needs to show they won’t squander the cash gift. This means the sum needs to be left in the child’s bank account for a certain period in order to demonstrate the loan can be serviced. Lenders have their own policies on this and the period can vary from three to six months.
- A cash loan instead of a gift
Much less risky is to treat the financial assistance as a loan. But this necessitates having a legally binding agreement drawn up. A loan document should be signed by all parties and set out all the terms of the loan (including any interest payable, how repayment will be made and deadlines). When drawing up the loan agreement, parents should keep a form of charge over the property, such as a mortgage or a caveat.
The loan agreement or contract can also be outlined in a Binding Financial Agreement, which removes doubt over how an advance or a loan is to be treated if a married child separates.
Lending the adult child a deposit under a fully documented agreement helps protect parents the most. But whichever method the parents decide to use to help their adult child obtain a property, it’s important to agree on a game plan with the child and fully document it. In considering helping children out in any of these ways, parents should always seek legal advice before advancing any funds.
Do you need assistance with drafting a Binding Financial Agreement or with another family law matter? Please contact Canberra family lawyer Cristina Huesch or one of our other experienced solicitors here at Alliance Legal Services on (02) 6223 2400.
Please note our blogs are not legal advice. For information on how to obtain the correct legal advice, please contact Alliance Legal Services.