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Owning your first home has long been considered the Australian dream, but the changing property market is helping to ensure that it remains just that for many young people. Even with initiatives such as First Home Owner Grant schemes, housing ownership remains unaffordable to many.
Figures from the Australian Bureau of Statistics show that Australia’s property prices have rebounded since the dark days of 2008 by a staggering 112%. Furthermore, the International Monetary Fund reports that Australia rates as 34th in the world for the highest house price-to-income ratios. It is due to this lack of affordability that many younger prospective first home buyers are asking their parents for assistance in fulfilling their first home ownership dreams.
The pitfalls
While parents often have the best intentions when purchasing a house for their children, several potential challenges may arise that can impact both the parents and the child. These include:
1. Tax Consequences
The tax treatment of the property hinges on whether rent is charged to the child. If the child pays rent, the property’s expenses, such as maintenance and interest on loans, may be tax-deductible. However, this comes at a cost—capital gains tax (CGT) will apply when the property is sold, potentially reducing the overall financial benefit. On the other hand, if no rent is charged, the property is not considered income-generating, and the parents lose the ability to claim deductions while still being subject to CGT on any appreciation in value.
2. Opportunity Cost
Generosity towards children can sometimes jeopardize parents’ financial security. Using retirement savings to purchase a property might seem like a worthwhile sacrifice in the short term but could lead to financial strain in later years. Parents who prioritize helping their children over maintaining their own financial well-being risk regretting the decision, particularly if unexpected expenses arise or retirement income falls short.
3. Government Benefits
Ownership of the property has implications for eligibility for government benefits like Centrelink. If the property remains in the parents’ name, both the asset’s value and any associated rental income will be considered when calculating entitlement levels. Conversely, if the property is placed in the child’s name, it may be treated as a gift. Any amount exceeding the allowable gifting limit will be deemed an assessable asset for up to five years, potentially reducing the parents’ benefit payments. These complex rules highlight the importance of seeking professional advice before proceeding.
Alternative options
Despite the challenges, there are practical and beneficial ways for parents to assist their children in entering the property market while maintaining financial security and encouraging responsibility:
1. Gifting a First Home Deposit
Rather than purchasing the entire property, parents can gift their child a deposit. This approach can significantly ease the financial burden and often enable the child to secure financing for the rest of the purchase. By transferring the responsibility for mortgage repayments to the child, this option teaches financial discipline while reducing the impact on the parents’ long-term financial position. Additionally, gifting a deposit rather than the entire property may help avoid complications with Centrelink benefits and gifting rules.
2. Acting as a Guarantor for a First Home
Parents can offer their assets, such as equity in their own home, as security for their child’s first home loan. Acting as a guarantor can help the child access a loan without the need for a large deposit, often allowing them to avoid paying lenders’ mortgage insurance. However, this option requires careful consideration, as the parents will be liable for the loan if the child defaults, which could jeopardize their own financial stability. Clear communication and a formal agreement are crucial to managing this arrangement.
3. Buying the Property Together
Joint ownership is another viable option, where the parents provide a deposit and agree to split the ongoing costs, such as loan repayments and maintenance, with the child. This arrangement ensures that both parties share responsibility for the property, fostering accountability and teaching the child valuable financial management skills. Additionally, the shared financial commitment can minimize the strain on the parents’ finances while still providing substantial support to the child.
By carefully considering these alternatives, parents can strike a balance between helping their children achieve homeownership and safeguarding their own financial future. Consulting with a financial adviser or property expert is recommended to navigate the complexities of these decisions.
Put it in writing
There is a range of legal issues to be considered before entering into these arrangements. The rights and responsibilities of each party should be clearly and formally documented and address key decisions. These include, but are not limited to,
- who is responsible for ongoing maintenance and costs on the property;
- what to do if either party wishes to terminate the arrangement;
- what happens if the child cannot meet repayments;
- how the property will be held when/if the child marries/divorces; and
- what happens to the property when the parents pass away.
Helping out your kids into their first home might seem like a good idea, but it is important that professional advice is sought first. Your financial adviser can help you to explore the available options to ensure that you find the solution that best suits your family’s circumstances.
