Help Your Kids Buy a Home Without Risking Retirement
That doesn’t make you selfish, just prudent. And there are ways to give your children the boost they need and still enjoy a comfortable retirement with financial security.
Review your own financial situation first
Before you open a branch of the Bank of Mum and Dad, make sure your own retirement needs are covered. Calculate your retirement income – superannuation, investments, Age Pension if eligible – and estimate your current and future living costs. Ideally, factor in an emergency financial buffer and plan for an extended life expectancy.
Once you’re sure you can afford to lend a hand, you can choose one or more of several methods:
- Hand over cash towards a deposit
Saving enough for a house deposit is a tough challenge, and a cash gift will give them a real boost. Make sure, though, that you only part with what you can afford, because you won’t see that money again.
- Give them a loan
If you can’t afford to lose the income from the cash permanently, consider giving them an interest-free or low-interest loan. You’ll need to make it clear that it is a loan and not a gift, and have it legally documented.
- Become a guarantor
Another popular option is for parents to act as guarantors for a part of their child’s mortgage, to enable them to avoid paying for expensive Lenders Mortgage Insurance (usually required when the mortgage amount is more than 80% of the assessed value of the property).
The mortgage guarantee will usually be secured against your own home, so be aware of the fact that the lender will pursue you for repayment if your children default on their loan. In the worst-case scenario, you could end up losing your own home.
- Share the ownership
If you have substantial equity in your own home, or own it outright, banks will regard you favourably as a joint borrower with your child. This means that you could share the mortgage and ownership of a property you purchase together, as well as potential capital gains. Once again, it’s vital to have the situation properly documented, so get some legal and financial advice before you commit.
- Provide practical help
Even if you can’t give direct financial assistance, there are other ways to help them. You could allow them to live with you rent-free while they save for a deposit, or assist with the formalities of applying for a mortgage or First Home Owner Grant.
Know the Centrelink ‘deprived asset’ rules
If you receive a full or part Age Pension, you need to be aware that you can only make a gift of $10,000 per year, and a maximum of $30,000 in any 5-year period, if you want to avoid your gift being regarded as a ‘deprived asset’ for five years. This means that any amounts exceeding this will be counted as still being your assets when determining your pension eligibility, and when calculating your income under the deeming rules.
A loan to your child can affect your pension too, since it will be counted as an asset for pension eligibility and deeming.
Avoid damaging family dynamics
Parents who have only one child don’t need to worry about perceived favouritism or unfairness, but where there’s more than one child to consider, tread warily. You may need to make it clear that the same help will be available for all your children, or that appropriate provision will be made in your estate planning.
It’s also worth hesitating before you buy your child a house outright, even if you can afford to do so. Handing it to them on a plate could have two detrimental effects. You will deprive them of the sense of achievement that will come from managing most of the cost themselves, and it may also set a dangerous precedent that prevents them from learning financial responsibility.
