Real Estate and The Bank of Mum and Dad

The Bank of Mum and Dad is one of Australia’s top ten mortgage lenders with parents giving, lending or underwriting record amounts for their adult children to buy their first home. A handout from mum and dad is sometimes the only way younger buyers can enter the property market.

According to Sarah Megginson, home loan expert at Finder, “Saving for a deposit is still one of the biggest struggles for those looking to take their first steps on to the property ladder, especially if you’re paying rent at the same time. With housing prices increasing at the fastest rate since 1988, it’s not surprising to see so many parents helping their children get their foot in the door. With property prices showing no signs of slowing down, it seems many parents feel a responsibility to give their kids a financial leg up.”

Not only are they lending their children money, parents are also assisting by providing rent-free or subsidised accommodation, helping with childcare and assisting with expenses or bills.

“Buying a home is a huge responsibility that goes beyond the cost of buying…you can’t always rely on mum and dad to come to the rescue. I’d encourage all parents to set firm financial boundaries with their adult kids, so they know when to help themselves. Teach them how to save, how to compare bank accounts and how to set up their own emergency fund,” said Megginson.

“Too much generosity from parents could hurt their own standard of living in retirement. Parents need to be very careful when choosing to financially help their children. Supporting your kids is how many see the job of a parent, but mum and dad need to make sure they aren’t leaving themselves vulnerable in the process”.

Lawyers warn gifts or loans that are not properly documented or exclude other family members, can create financial and legal problems that undermine relationships and often end up in court. It is imperative to have fully documented agreements between parents and children to ensure relevant members understand what is involved in an arrangement that could last for decades.

I personally know a parent who had rented their investment property to their child with the intention of the child buying the property in the future. Unfortunately, the child thought a portion of their weekly rent was going towards the purchase of the property however, the parent hadn’t agreed to this and nothing had been documented, resulting in a very messy and costly legal situation.

And let’s not forget the taxation implication some of these financial arrangements may have for the parents.

According to the ATO, if you lend your child money and the child pays interest on the loan, this needs to be recorded as income even though it’s a family member. If you are on a pension and you are not actually receiving any income from the child, you are still “deemed” to be earning an income.

You also need to consider the other side of the transaction i.e. when the child sells the property. The Capital Gains Tax owing from the sale could be a very unexpected and expensive shock for an unprepared parent.

We recently sold a property where the parent had used the capital in their own home as guarantee against their child’s loan. The bank facilitating the loan requested the parent and child be registered as joint tenants, each owning an equal 50% share in the property. The parent received no income from the property nor paid any expenses for the property…in their mind, it was the child’s property and they expected nothing from the property.

Unfortunately, the parent didn’t realise they would need to pay Capital Gains Tax on the sale profit, which was quite substantial as you can imagine in this market. Thankfully they were made aware of the situation prior to settlement so were able to withhold enough funds from the sale proceeds to cover the foreseen upcoming tax debt.

Sarah offers some great advice….”If you go guarantor on your child’s home, research all possible outcomes, good or bad. See a mortgage broker or financial planner together, to help you make the right decision.  Your children need to understand that if they fall behind on their repayments you are financially liable, and your own assets are at stake.”

As parents, we want to see our children succeed and want to help them in any way we possibly can. However, when it comes to real estate and the associated financials, always seek legal advice and clearly understand exactly what the full implications of your choices will be.

Remember, if you need any help or advice, we are just a phone call away.

All the best, Simon.

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