Home sweet home: helping your kids buy property
16 Mar 2015
Australia’s house prices are rising strongly in many cities, and retirees are helping their children who have been priced out of the market. They’re guaranteeing loans, gifting or lending money, or buying with their kids so they can afford a home.
Some methods are more risky than others. But helping kids buy in nearby areas, particularly, can make a lot of sense for retirees. It creates a support network that benefits both the kids and their parents.
“I do think it’s a good idea [helping kids to buy houses], provided it’s documented well and it’s a bit more of a commercial transaction rather than a family transaction,” says Darren McDonald, a director of accounting firm, Moore Stephens.
On the rise
According to RP Data, house prices have continued to rise this year. While the gains have been mixed, prices in Sydney surged 13 per cent, Melbourne increased by nine per cent and in Brisbane, over five per cent.
Median house prices are now $680,000 in Sydney and $555,000 in Melbourne. Younger Australians are being forced to take on bigger mortgages, rent, stay longer at home with their parents, or move further out. Some kids can service the loan but don’t have enough money saved for a deposit.
In the wake of falling affordability, more parents are providing financial assistance for their kids to buy. “I’m seeing a lot of it,” McDonald says. “Kids can’t afford to live in the area they grew up in. They can buy a property 40 kilometres out of the city; but there’s no way they can buy something close.”
McDonald says there are also non-financial benefits for retirees to help their kids buy closer. If children are nearby, they can help with daily chores. That support might allow retirees to stay at home longer before moving into aged care; the grandparents in turn can also help with their grandchildren. “It creates a family network in close proximity, and provides security for parents in later life,” McDonald says.
Choosing the right option
There are a number of ways retirees can help their children buy a home.
Option One
Going guarantor for their children’s loans: guarantee is an agreement you sign that means that if your child can’t make repayments on the loan, you will be responsible for repaying back the entire loan.
“I don’t like that,” says Mike Umbers, a director of mortgage broker, Premium Lending Group.
“If your kid loses their job, then the parent is on the hook and they could lose their retirement savings.”
Option two
Family pledge: which allows the guarantee to be limited to a specific amount, while still allowing the children to borrow more and avoid mortgage insurance. “It seems to work in a lot of circumstances,” says Umbers.
If a child wants to buy a $500,000 home for example, but only has a $20,000 deposit, the bank can take part security over the parents’ home. As the kids either pay down the loan, or the value of the property rises so the loan is only 80 per cent of the house’s value, the parent’s guarantee is then released.
Other ways
There are other safe ways. Obviously simply gifting the money to your child may seem financially simpler at first.
However, McDonald says it can still create issues. One of his clients lent $1 million to their daughter. Shortly afterwards, her relationship broke up. There was an argument over whether the money was a gift or loan. If it was a gift, the daughter’s ex-boyfriend would have been entitled to a portion of the gift.
Fortunately, the $1 million was lent by the parents through a family loan document, so the ex-boyfriend didn’t have a claim to the money.
McDonald says lending the money also allows retirees to charge their children interest to generate income. An interest rate of four to five per cent cuts out the bank margin, which helps the kids, but it’s also a better rate than retirees earn on term deposits.
For retirees on the pension, any loan to children will still be treated as their asset, and they’ll be deemed to earn money on it if they charge interest. “If they’re not in receipt of a government pension, it doesn’t matter,” McDonald says.
Ultimately, retirees have to balance their financial needs with those of their children and not take any undue risks that could put their savings at risk.
However, if retires would like to pass on an inheritance to their children, supporting them to buy a house allows them to do it earlier. And there may also be a few upsides for them in having family support close by.
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