Assisting Your Children with Home Purchase: A Guide for Families

As the cost of living continues to rise and property prices soar, many young adults find themselves struggling to enter the housing market. This has led to a growing trend of parents stepping in to provide financial support, often referred to as the “Bank of Mum and Dad” (BOMAD). While this assistance can make a significant difference, it’s important for families to carefully consider the options and implications of such support. Here’s an overview of some of the ways parents can help their children buy a home, along with the potential benefits and risks associated with each method.

1. Direct Financial Gifts

One of the simplest ways parents can help is by providing a cash gift. This method has the advantage of being straightforward—there are no strings attached, and the money can be used directly towards a down payment or other home-buying costs. However, it’s important to note the following:

• Tax Implications: In Australia, cash gifts generally have no tax implications for either the giver or the receiver. However, if the gift is substantial, it could impact the giver’s financial situation, especially if they are on an age pension or other benefits, due to the government’s asset assessment rules.
• Risk of Division in Divorce: If the recipient is married or in a de facto relationship, a gift might be considered part of the shared assets in the event of a separation. To mitigate this, some parents opt to formalise the support as a loan rather than a gift.

2. Loans to Children

Another common approach is providing a loan instead of a gift. This can help keep the money within the family in case of a relationship breakdown. However, loans come with their own set of challenges:

• Impact on Borrowing Power: When a loan is formally documented, banks view it as a liability, which can significantly reduce the child’s borrowing capacity for a mortgage. For example, a $100,000 loan from parents could reduce the borrowing capacity from a bank by up to $270,000.
• Documentation and Legal Considerations: A formal loan agreement can protect both parties but requires clear documentation to outline repayment terms and conditions. This also ensures the loan is treated correctly by financial institutions and, in some cases, by courts during legal disputes.

3. Acting as a Guarantor

Some parents choose to help by acting as a guarantor on their child’s mortgage. This can increase the child’s borrowing power without requiring an immediate cash outlay from the parents. Key considerations include:

• Financial Risk: Acting as a guarantor means the parent is legally responsible for the mortgage if the child defaults. This can potentially jeopardise the parent’s financial stability, especially if they are nearing retirement.
• Partial Guarantees: Some parents choose to limit their guarantee to a specific portion of the loan (e.g., the first 20%), which can reduce their exposure to risk.

4. Purchasing Property for Children to Rent

An innovative approach some parents take is buying a property themselves and renting it to their children at market rates. Over time, the children may either buy the property or inherit it. This strategy can have several benefits:

• Building Financial Responsibility: By charging market-rate rent, parents can help their children learn to manage regular housing expenses.
• Negative Gearing: In some cases, parents may benefit from negative gearing, where the rental income is less than the expenses of owning the property, potentially reducing taxable income.

5. Binding Financial Agreements

For parents concerned about protecting their contribution in case of their child’s relationship breakdown, a binding financial agreement (BFA) can be a valuable tool. These agreements can outline how the money will be treated if the child and their partner separate:

• Legal Protection: A well-constructed BFA can help ensure that any financial support given to the child is protected and returned to the parents in the event of a divorce.
• Cost Considerations: BFAs can be costly, ranging from $3,500 to $10,000, but they provide peace of mind by clearly defining the terms of financial assistance.

6. Other Financial Arrangements

There are also more creative solutions that some families use:

• Family Guarantee Term Deposits: Instead of giving cash directly, parents can place funds in a term deposit with a bank that serves as collateral for the child’s loan. This way, the money is eventually returned to the parents, along with interest.
• Offset Accounts: Parents can help with ongoing mortgage payments by placing money in an offset account, which reduces the interest payable on the child’s loan.

Conclusion

Helping children into the property market can be a rewarding but complex decision, with various options and potential pitfalls. It’s essential for families to thoroughly understand the financial, legal, and emotional implications of each approach.

At 360Private, we specialise in advising families on the best strategies to support their children’s homeownership goals while safeguarding their own financial futures. If you’re considering helping your child purchase a home, contact us today to discuss the most suitable option for your family’s unique situation.