First Home Help for Your Children

This is a guest post from William Eve, William Eve writes about saving money, mortgages and real estate for HomeLoanFinder. Compare different mortgage products on the HomeLoanFinder website to find the right mortgage for your first home.

It has become increasingly harder in these troubled economic times for young people to afford to buy their first home without financial help from their parents.

A recent survey found that 43% of first home buyers thought the biggest barrier to buying a first home was saving for a deposit, and 1 in 3 first-time buyers had to borrow money (aside from a home loan) to get on the first rung of the property ladder, or they had to rely on a monetary gift from parents or family members to help with the costs of home-buying.

Generally, parents are more and more worried that their offspring may never be in a financial position to afford their own home, and they are therefore taking steps to ensure this sorry situation does not transpire.

Early inheritance

Where finances allow, some parents are deciding to give their kids an early inheritance by buying their first house for them. This may mean buying the house outright, taking a mortgage in their own names, taking a joint mortgage with their kids, acting as guarantors on mortgages, or offering up the down payment to start them off. Where the house is bought outright, the son or daughter may be charged rent, often far below the going rate.

Parents buying in their own name

Doing things this way means that there can never be any issue over who has any share in the property should the offspring split with a partner or spouse who they are cohabiting with. The problem with taking this route is that the parents will be liable for tax on any rent received from their own children, and there will be the issue of Capital Gains Tax as and when it comes time to sell. This will be in addition to the inevitable costs of selling the property, which will include the stamp duty. In cases where the child owns and lives in the property, there is no liability for Capital Gains Tax.

Parents buying jointly with the child

This clearly allows the child more power to be named on a mortgage and then be responsible for paying it down, but Capital Gains Tax may still be payable on the parent’s portion of the property when it is sold. There could also be the problem in the case of non-payment by the child that the parent becomes liable for the entire amount of the mortgage, as is the case with any loan taken out in joint names.

Parents being guarantors on the mortgage

The same situation as just described could also arise in the case of non-payment by the child on a mortgage guaranteed by a parent. The whole point of a guarantee is obviously that the bank knows the debt will be covered whatever happens, which puts the parents in a potentially vulnerable situation, especially if their own finances are not really in a state to support an ongoing payment of a large debt.

Parents making gifts

This may be towards the deposit or as an amount deposited into a First Home Saver Account, in which case the contribution can attract significant tax concessions. In response to such a contribution, the government will chip in 17 percent of the first $5000 paid in each year, and earnings within the fund are taxed at 15 percent.

Any withdrawals that are used to purchase a home are tax-free, but for tax concessions to kick in the account must have been active for a period of four financial years. Recently, the government added significant flexibility to these First Home Saver Accounts by allowing first-time buyers who purchase within the first four years the opportunity to transfer their money to a mortgage when the account matures.

Protecting the investment

As mentioned already, the downside of parental help for a child buying a first home is when the child is living with a partner or spouse and they subsequently split up, leaving the partner able to claim on their share of the property because the parents’ financial help is viewed as jointly owned. One way to avoid this happening is by drawing up a legal document that defines the financial help as a loan. This will inevitably involve seeking the help of a lawyer to ensure that money intended to help a family member does not end up as monetary gain for an estranged partner of the child. The loan does not have to charge interest for this to work. Either way, in the event that the relationship ends, the parent can invoke the loan and request that it be repaid in full, meaning that any division of assets happens after the loan has been taken out of the equation. Assuming things do go to plan, the loan can of course at any time be written off. The other option is for the child to arrange with their partner to draw up an agreement that specifies how the loan will be handled in the event that things go wrong. The obvious downside with this or a prenuptial agreement is the tacit acceptance at a time when the relationship is good that it may not stay that way for ever, which some may view as rather unromantic.

Social security implications for parents

Parents who are within five years of pensionable age need to consider the possible effects on their social security situation. The allowance on gifts in a financial year is $10,000, or $30,000 in any consecutive five years. Exceeding these amounts will affect pension entitlement, as it is assessed as a deprived asset. In fact, any financial interest in the property such as a loan will count as an asset with regards to pension entitlement.

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