The transfer of wealth from the baby boomer generation has kicked off, with home ownership at the heart of it. In NSW, the average home price is a staggering $1,184,500—the highest in the country. Following are Canberra at $948,500 and Victoria at $895,000, with the Northern Territory coming in lowest at $489,200. With the target cash rate predicted to hold steady at a 12-year high of 4.35% throughout 2024, there’s increasing pressure on parents and families to help the younger generation step onto the property ladder.
Over the past 15 years, home ownership in Australia has dropped from 70% to 67%. This decline could widen the wealth gap since owning a home significantly contributes to wealth accumulation for many. The Actuaries Institute notes that wealth inequality is significantly greater now than it was in the 1980s, with the top 20% of households holding six times the disposable income of the bottom 20%.
According to the Domain’s First Home Buyer Report 2024, it takes a couple aged 25-34 around six years and eight months to save a 20% deposit for an entry-level home in Sydney and five years and five months in Melbourne (the Australian average is four years and nine months). During this time, many are either reluctantly paying rent or living with their parents.
Should You Help Your Kids Buy a Home?
Many parents prefer assisting their children when needed rather than leaving an inheritance later. However, any support you provide must maintain your financial security. Assess what you can realistically afford to give.
The Downside of Cash Gifts
Giving cash for a deposit or mortgage is straightforward but has its downsides. If the gift covers all or a large part of the deposit, lenders may need proof that the amount is a gift, not a loan (a gift letter). In case of a divorce or separation, the gift may be part of the property pool divided between the couple. Fortunately, cash gifts from family out of natural love and affection are usually not taxed.
The ‘Bank of Mum & Dad’
If you decide to loan your child money to buy a home, document the loan terms, preferably with legal assistance. You can structure the loan in various ways, such as mimicking a bank loan with interest and regular repayments or arranging for repayment upon the sale or transfer of the property. In the event of your death, your estate can manage the loan.
It’s crucial to consider scenarios like divorce, remortgaging, death, or a falling out. Always plan for the worst while hoping for the best.
Providing Security to Lenders
You can use a family guarantee to support a loan, avoiding lender’s mortgage insurance. This involves providing equity (often your home) as security. If your child defaults, you’re responsible for the guaranteed amount. If you secure the loan against your home and can’t repay it, your home could be sold.
Evaluate the impact on your finances before acting as a guarantor. Ensure your retirement plans aren’t compromised, and consider equalising the impact of your support among all your children in your estate.
Co-Ownership
Buying property with your children can be structured as joint tenants or tenants-in-common. Joint tenancy means the property is split evenly, and your share passes to the other owner(s) on your death. Tenancy-in-common allows for different ownership proportions, and your share is distributed according to your will.
Regardless of the structure, you might be liable if the property is mortgaged and the other party defaults. Ensure a written agreement is in place, outlining what happens if circumstances change, like needing to cash out or if there’s a disagreement about selling.
Capital gains tax (CGT) likely applies if you’re not living in the property as your primary residence. Keep records of all related costs to maximise your CGT cost base and reduce any capital gain on disposal.
Using a Family Trust
A more complex option is buying property through a family trust. This can protect assets, with you or a related company acting as trustee. Eventually, you could pass control to your child, possibly without significant CGT or stamp duty liabilities.
Be aware of state tax issues, such as the tax-free land threshold not applying in some states and increasing land tax liability. Foreign beneficiaries could result in higher stamp duty rates.
Reduced or Rent-Free Property
Buying a house for your child to live in rent-free or at reduced rent provides them with a home but doesn’t help them build wealth. Rent must be at market rates to claim full deductions for expenses. The ATO may deny or reduce deductions if rent is below market rates.
Any rental income is taxable, and CGT will be payable on any gain when the property is sold or transferred. Ensure your will is clear if you plan to leave the property to your child.
Considering all these options, it’s essential to balance helping your children with securing your financial future.