We’ve all heard the statistics about children living with their parents into their thirties, but while crippling house prices may be to blame, some parents are taking a more pro-active approach and shuffling their children out the door and into their very own first home.
Even the most kind-hearted parents however must think about how this may affect them and their children moving forward. Is the help going to be a one-time offer or ongoing, what sort of exposure will you face and does the reward outweigh the risk?
The more common approaches to helping your children buy property are:
Some fortunate first home buyers are given a helping hand from their Mum and Dad to raise a deposit. After this money is handed over however there is little recourse for parents to reclaim this money should the need arise.
Divorce and separation are becoming increasingly common. If this happens to your child’s relationship, the gift would form part of the joint relationship property pool and can be divided between the parties (even if this was not your intention). Similarly if your child starts facing financial difficulties or they have creditors at their heels, you and your child may never see this money again.
If you receive a pension, gifts may also be seen as the disposal of assets and could alter your entitlements, which is an important consideration in protecting your own financial interests.
To protect your interests, as well as the interests of your children in the event of a relationship breakdown or financial woes, it may be wiser to loan the funds instead. A loan provides greater security and certainty in the arrangement, allowing the loan to be called upon if and when necessary. In this instance, you would be removing the loan funds from the pool of assets (potentially with interest).
Proper legal advice is crucial in ensuring the loan arrangement is established and recorded effectively, and potentially even registered on title by way of a mortgage for additional protection.
3. BINDING FINANCIAL AGREEMENTS
To go one step further, upon either gifting or loaning your child money you may wish to request that your child enter into a Binding Financial Agreement with their partner to acknowledge the sum of money and to exclude it in the event of a relationship breakdown. This will require both your child and their partner to get independent legal advice respectively, but it is important as it further protects the financial interests of you and your child should you choose to re-gift or re-loan this sum after their relationship is completely dissolved.
4. BUYING OR BORROWING TOGETHER
Another option is to purchase the property co-jointly with your child. While this allows you to retain some control as your name is on title, it may also have some serious tax and estate planning implications which should be considered before signing on the dotted line.
Alternatively some parents choose to guarantee their child’s mortgage, often putting their own homes or personal assets up as security. Here, parents get the financial risk without having a proprietary interest in the property. If your child was to default on their mortgage, the bank may come straight to you to remedy the default. To guarantee another persons debt, with potentially unlimited liability, is a serious decision and not to be taken lightly.
Protect everyone’s interests from the outset and get the right advice to ensure your good intentions achieve the reduced risk, tax effective, thoughtful objective that you intend.
At Southern Waters Legal we have solicitors who specialise in Property Law, Family Law, Tax Law and Estate Planning to guide you on giving your children a head start while minimising the risk. To discuss your situation call us on 02 9523 5535.