Financially assisting your children into the property market

Many of our clients express a desire to provide their grown children with financial assistance to help them enter the property market.

Financial assistance can help your children enter the property market sooner than if they were to save the entire deposit themselves, and any contributions to the deposit can help to reduce or avoid Lenders Mortgage Insurance (LMI) on your child’s loan.

Recent figures show the median price in Australia’s combined capital cities for houses is $912,119 and for units is $629,588 (source: CoreLogic Home Value Index as of 31 August 2022).

Banks generally require a 20 per cent deposit towards the purchase price of a property, otherwise there may be additional costs such as LMI. According to the ANZ CoreLogic Housing Affordability report, a 20 per cent deposit for the median dwelling as of March 2022 was $147,795. The report estimates the time to save this deposit amount is 11.4 years, which is a record high.

In addition to the 20 per cent deposit required by the bank, your child may have to pay stamp duty, meaning a higher amount of savings is required. First homeowner stamp duty concessions are available where the property value is between $650,000 and $800,000, after which the concessions no longer apply.

Providing financial assistance to your children to help them purchase a property Is possible in the following ways:

	Gift cash	Provide a Loan	Go Guarantor	Limited Security Guarantee	Buy together	Family Trust
Complexity	Simple	Some complexity	Some complexity	Some complexity	Complex	Complex
Tax Implications	None	Depends on loan structure	None	None	Yes	Yes
Who has control?	Child	Parent	Child	Child	Both parent and child	Both parent and child
Benefits	Simplicity	Ability to recall the funds	Provide assistance without using cash	Provide assistance without using cash	Provide assistance without using cash	Control and flexibility
Risks	Relationship breakdown	Not viewed favourably by bank	Parents home is at risk as they are also liable for the loan	Parents home is at risk as they are also liable for the loan	Parent and child are both liable for the loan	Complexity and additional costs

Gift cash

A gift of cash can be provided to your children with no obligation of repayment.

When a gift is made, the recipient becomes the full legal owner of the subject of the gift and does not need to make repayment.

Where a parent gifts funds to their child, those funds are considered an asset of the child, and will form part of any property settlement in the event of a future relationship breakdown.

In addition, if a child were to experience financial difficulties, potential creditors could make a claim against the money. 

Benefits:

• A cash gift keeps things simple
• There are no tax implications of gifting cash for the giver or the receiver
• By transferring wealth to your children during your lifetime, your children can immediately access those funds, rather than waiting to inherit the funds after you pass away.

Things to consider:

• Your child still needs to prove they can service the home loan
• Your child may have to wait for several months before they can apply for a loan. Depending on the lender, this period can vary from three months to six months
• Some lenders do not allow people to use cash gifts as deposits
• Gifting funds to your children reduces the level of assets you will have available to fund your retirement
• There could be social security implications for you.

Provide a loan to you child

You could consider providing cash to your children as a loan. You may have no intention for the child to repay the funds, however loaning the funds rather than gifting them means you have the option of recalling the money.

If the funds were given to a child by way of loan and subject to the terms of a Deed of Loan, the funds would be considered a liability in family law property proceedings and be repayable to the parent in full. This would safeguard and protect the monies provided to your children in the event of a future relationship breakdown.

Benefits:

• A loan agreement helps to protect the money in the event of any future relationship breakdown
• You can forgive the loan in the future, either while you are alive or via your Will.

Things to consider:

• The terms of the loan should be carefully considered based on your circumstances
• If the loan is interest free, there is no taxable income from the loan. However, if the loan is interest bearing, the interest has to be reported as income
• The bank will assess the child’s capacity to service a loan based on two loans, which could hinder their application
• Additional costs and charges of engaging a solicitor to legally prepare a loan agreement.

Become a guarantor for your child

You could consider becoming a guarantor for your child, which means they can use the equity built up in your home as security against their loan.

Being a guarantor is effectively a promise to the lender that if your child is unable to honour their repayments, you will cover them and raise a portion of the value of your home as security.

Benefits:

• By using your home as security, you can provide assistance without using your own cash or assets
• The child may be able to borrow more than they otherwise could.

Things to consider:

• You need to be confident in your child’s financial situation
• You are liable for the amount you guarantee. This means if the borrower (your child) cannot repay their loan, you will pay the lender
• If you choose to use your home as security and do not have cash to make a repayment if required, you could be forced to sell your home
• While acting as guarantor, your ability to borrow may be reduced
• If the child buys the property in joint names with their partner and the relationship fails, the child could lose half the house, but you would remain guarantor for the full value of the loan.

Limited Security Guarantee (LSG)

Rather than being a full guarantor, you could limit the level of security you provide.

A limited security guarantee loan means you act as guarantor to help your child secure a loan. It is the same as having a guarantor on a normal home loan, however your liability is limited to part of the loan.

Benefits of LSG:

• You have the choice of using cash or equity in your home
• You choose the amount to commit, up to 50 per cent of the loan value
• You can be released from the guarantee as soon as the Loan to Value Ratio (LVR) drops below 80 per cent
• The loan would be completely in your child’s name.

Things to consider:

• You need to be confident in your child’s financial situation
• You are only able to represent up to 50 per cent of the security
• You are liable for the amount you guarantee. This means if the borrower cannot repay their loan, you must repay the lender
• If you choose to use your home as security and don’t have cash to make a repayment if required, you could be forced to sell your home
• While acting as guarantor, your ability to borrow may be reduced

Buy a property together with you child

You may consider purchasing a property together with your child as ‘tenants-in-common’, meaning you each have individual shares of ownership. For example, you as the parent might own 30 per cent and your child owns 70 per cent.

Buying a property together may be done in anticipation of your child buying you out in the future, or with a view to selling the property in future and sharing the proceeds, resulting in your child having a larger deposit for a property of their own.

Benefits of buying a property together:

• May be a good solution if you are unable, or do not wish to, provide a gift or loan to your child
• Buying a property together effectively means purchasing an investment property.

Things to consider:

• You and your child are both liable for the full amount of the loan. If your child’s circumstances change in future, you will need to manage the repayments
• Upon sale of the property, a capital gains tax event will occur which may result in you incurring a tax liability in that financial year. If the property is the principal place of residence for your child, they will be able to utilise the main residence exemption for capital gains tax purposes with respect to their share of the property.

Using a family trust to purchase property

You may consider establishing a family trust to purchase the property, where you as the parent is a trustee. At some point in the future, you can pass control of the trust over to your child.

Benefits:

• If you set up the trust with a corporate trustee structure, there will be no capital gains tax or stamp duty payable upon passing control of the trust over to your child
• You can retain a level of control over the trust while allowing your child to borrow against the property
• There can be a lot of flexibility in this structure.

Things to consider:

• A trust is a separate legal structure that requires its own tax return to be lodged
• Fees and charges as a result of establishing the structure and for ongoing administration and lodgement of tax returns
• Upon sale of the property, a capital gains tax event will occur which will result in a tax liability in that financial year. Even if the property is a principal place of residence, owning the property through a trust structure means that the main residence exemption for capital gains tax purposes will not apply
• In some states, owning properties through a family trust means that your property may not be eligible for the tax-free land threshold which may result in a high land tax bill.

Given the complications that can occur when a parent gives money to their child, it is important that you are well advised of the consequences. We recommend that you seek legal advice to consider the most appropriate strategy for you.

Please also be aware that some of these methods can impact on your child’s ability to access first home-owner grants.

In all situations, it may be a good idea to discuss your intentions as a family and to update your Will to ensure other beneficiaries are not disadvantaged and to avoid family issues in the future.

Should you wish to discuss one of these options further, please speak to your local BDO Private Wealth adviser.

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This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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