Owning your 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 the First Home Owner Grant scheme, 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 62%. Furthermore, the International Monetary Fund reports that Australia has one of the highest house price-to-income ratios in the world. It is due to this lack of affordability that many younger prospective home buyers are asking their parents for assistance in fulfilling their home ownership dreams.
The Pitfalls
Whilst parents who buy a house for their children do so with the best intentions, there are hazards that me befall the unwary. These include:
– Tax consequences – how the property will be treated for tax purposes depends on whether rent is charged. If the child pays rent, expenses will be tax-deductible, but capitals gains tax will be payable if the property is sold.
– Opportunity cost – many parents may not be doing themselves any favours if their own financial well-being and security is compromised by their generosity. Relying on retirement savings to purchase a property late in life could be a decision later regretted.
– Government benefits – if the property is owned by the parents. both the asset and any income will be included when calculating eligibility for Centrelink entitlements. Alternatively, should the property be placed in the name of the child, it will considered a gift, meaning that the amount over the gifting limit will be deemed for up to five years. This can affect the level of benefits the parents might receive.
Alternative Options
It’s not all doom and gloom though. There are ways for parents to assist their children to enter the property market that can also help deliver valuable life lessons. These include:
– Gifting a deposit – instead of buying the whole property, gifting the deposit can often be sufficient to help offspring obtain finance, with the child taking responsibility for loan repayments. Furthermore, this option can address Centrelink concerns, and lessen the impact on the parent’s financial security.
– Acting as guarantor on a loan – this involves using the parents’ assets as security for all or part of their child’s home loan.
– Buying the property together – this arrangement generally involves parents providing a deposit, with the ongoing costs of the property being split between the parents and the child.
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 the ongoing maintenance and costs on the property;
– What to do if either party wishes to terminate the arrangement;
– What happens is the child cannot meet repayments;
– How the property will be held when/if the child marries/divorces; and
– What happens to the property when that parents pass away.
Helping out your kids might seem like a good idea, but it is important that professional advice is sought first. Your Caveo Partners Financial Adviser and Finance Adviser can help you to explore the available options to ensure that you find the solution that best suits your family’s circumstances.
Sources:
www. natsem.canberrg.edu.au The Great Australian Dream – just a Dream? AMP NATSEM Income and Wealth Report Issue 29- July 2011
www.imf.org International Monetary Fund Global Housing Watch report October 2014 – results for Australia as at February 2014
www.imf.org International Monetary Fund Global Housing Watch report July 2015 Quarterly Update
www.abs.gov.au “Residential Property Price Indexes: Eight Capital Cities” (December 2016)