Home Deposit Help: Supporting Your Kids Without Risking Your Retirement – Guidance Financial Services
The high cost of housing in Australia is a well documented problem without an easy solution. Building more homes is clearly a key piece of the puzzle, but that requires all sorts of hurdles to be jumped, plus the skilled workers available to get the construction done. And no existing homeowners want to see the value of their property decline. It’s fair to assume then, that it’s not going to get any easier for our kids to get on the home ownership ladder.
With this awareness, the majority of the clients that I work with have as one of their objectives, an ability to assist the kids with their first home deposit.
This week in the blog I want to explore the options available if this is a goal of yours, and the issues to consider to ensure that you don’t put yourself at financial risk. There is certainly a balance to be struck here between generosity and personal financial security.
There are 4 main ways that I see people assist their children get into the property market. These are:
- Gifting a lump sum
- Providing a loan
- Acting is guarantor
- Co-buying a property
Let’s work through the pros and cons of each of these.
1. Gifting a Lump Sum
By far the most common way to help children into the property market is simply to give them a gift. The great thing about this approach is its simplicity. It also shows a level of trust and respect for your adult children, which I think goes a long way.
Something to think about if you have multiple children, is whether the gift will be identical for each where the timing of the gift is several years apart. If you give for example $100,000 to the first of your children who’s ready to buy, then your second child isn’t ready to make that move until five years down the road, do you need to bump up the gift a little so that it has an equivalent impact? There’s no perfect answer here, but I can share that most people do indeed adjust the gift up a little to account for this. It is important however to ensure that you discuss this with the family, as you wouldn’t want the first gift recipient to feel that the second one got some sort of favouritism.
I sometimes hear of people being concerned about gifting due to worries about relationship breakdowns. The solution here is usually to provide a loan, which is the next item that we will discuss. I do wonder however, whether this worry is overblown. In the event of a relationship breakdown, assets will be split, so it’s not like your son or daughter will be left with nothing. And where there are grandchildren involved, I can’t imagine you would really want your former son or daughter-in-law to be left destitute, which would undoubtedly be to the detriment of your grandchildren.
With regards to risk, the only issue here is ensuring you aren’t excessively generous. Get your financially modelling updated to ensure your planned gift is affordable.
2. Providing a loan
As just mentioned, the main reason for going down this path is concern around relationship breakdown. The parents providing the gift want to ensure that the funds are retained within the family.
Back in 2023, October 4 to be precise, I interviewed lawyer Bryan Mitchell about intergenerational wealth transfer, and the topic of family loans was canvased. If you’re thinking of heading down this path, you might want to give that one a listen.
Given the primary motivation for going with a loan rather than a gift is protection in the event of a relationship breakdown, then ensuring such a loan would hold up to court scrutiny is paramount. Things like having a formal loan agreement, and charging interest, are key elements to meeting this requirement. This adds complexity and formality which might be uncomfortable in a family situation, but without these steps, whilst you might consider the transaction to be a loan, from the outside, it is likely to be viewed as a gift.
3. Acting as a Guarantor
Sometimes you want to be able to help your children get into the property market, but simply don’t have the spare cash available to give them. I see this most frequently where parents have separated, and both have had to re-establish themselves, often carrying a mortgage quite late into life.
The clear risk with going a guarantor on your child’s loan, is that should they get into financial difficulty, you will be on the hook for the debt. There are different arrangements available, with some limiting the amount of the potential liability that you face.
In some instances, your home might be taken as security to support the new loan for your child. I have seen an instance where this caused headaches down the road, as the parents wanted to sell up and move into a retirement village, but were prevented from doing so because their home needed to be retained in order to secure their child’s loan.
To me, acting as guarantor would be a last resort, but it is an option available.
4. Co-buying a property
Another option is to buy a property with your son or daughter. It could be 50-50, but not necessarily so. This approach certainly would help protect wealth within the family. And there would be no need for charging interest, as would be the case with a loan.
Obtain advice on the best ownership structure from your lawyer if you are considering going down this path, and think through what the ultimate exit strategy will be. Is this a stepping stone home, that your child would expect to grow out of in the future? If that were the case, then there’s perhaps an obvious exit point for you. But if it’s a long term property that they perhaps plan on renovating or extending, can you afford to have your money tied up in this asset, generating no income, perhaps for a very long time? And if your son or daughter do you want to undertake renovations, will you contribute to the budget to reflect your share of the property?
Beyond these four primary ways to support your children get into the property market, there are two other things I think worth considering. Firstly, ensure that whatever gift or loan you are providing is affordable. You’ve worked hard for your money, and you won’t be doing your kids any favours if you then become financially dependent on them later in life.
Secondly, whilst the primary consideration is usually about helping with the initial home deposit, your support need not be a one and done event. Perhaps for instance, you make a contribution to the initial home purchase, but then 5 or 10 years down the road, make a further early inheritance gift, when your children are raising their own children, and perhaps under maximum financial stress. By leaving this assistance until later in life you have a greater clarity as to whether you have savings in excess to your needs, and it helps ensure that your children aren’t disincentivized from behaving financially prudently.
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