Should we help the kids buy a house?
There has been much talk lately of adult children turning to the “bank of mum and dad” to help bolster their house deposit savings and enable them to finance their first home.
On 1 October, the Reserve Bank regulated high loan-to-value ratio (LVR) lending by requiring home buyers to come up with at least a 20 per cent deposit. This is frustrating for would-be first home buyers who have found that the requirements to buy have changed. It has also been concerning to hear speculation that many young adults will simply ask their parents to help them get across the new threshold.
Parents will feel pressure but should not necessarily react to their children’s expectations, even if such expectations have been amplified by the press. The loan to a child must be carefully considered from all angles. A parent should be aware that the bank financier and mortgagee do not want the borrower/child to have loans outstanding to third parties including parents. From time to time, a bank will allow a loan from a parent to be recorded as a loan, but normally the loan must be interest free and only repayable when the property sells. Banks generally prefer that, if you are to assist your child, you make a gift of the deposit rather than a loan. You must consider particular issues:
- You cannot make a conditional gift. This means that you cannot ask for the gift to be paid back in the future and you will not receive interest. You will not have any say in how your child manages the gift received from you. If your child is in a relationship, the money you gift may well end up part of their shared relationship property. If your child ends her/his relationship, the gift cannot be clawed back. Will this be acceptable to you?
- By gifting large sums of money your ability to obtain means-tested benefits in the future is affected. Currently, if you require rest home hospital care and apply for the government subsidy, you will be asked if you have ever gifted $27,000 or more to another person (or other entity). A gift of more than this amount will be counted as part of your assets. This may mean that you need to pay for more of your care even if you do not have the funds due to the gift you have made to your child or children.
Some parents may be tempted to help their child by securing borrowing against their own family home. This may work for you, but you must consider the cost to you and what your ‘back up plan’ is, should your child’s circumstances change and you become responsible for repayment of the loan.
While it is not a legal requirement, you may want to consider the affect a gift to one child will have on that child’s relationship with siblings. Alternatively, can you provide the same benefit to all your children? There is no duty to treat your children equally during your lifetime, but it may well affect ease of conversation around the table on Christmas day.
While a parent always feels a responsibility for his/her children, you should avoid sacrificing your own standard of living now or in the future simply to provide immediate help to a child to purchase a first home. Sometimes patience and a good budget will work as well as a gift from a parent.