As the baby boomer generation begins a significant wealth transfer, home ownership emerges as a crucial catalyst in this shift. In New South Wales, the soaring average home price reaches $1,184,500, marking it as the highest in Australia. Following closely are Canberra and Victoria, where steep property prices continue to stretch the home ownership dreams of many young Australians thin.

In the last decade and a half, Australia has seen home ownership rates decline from 70% to 67%, contributing to a widening wealth gap that underscores the crucial role of property in wealth accumulation. According to the Domain’s First Home Buyer Report 2024, a typical young couple aged between 25 and 34 will now need up to seven years to amass a 20% deposit for a basic home in Sydney, slightly less in Melbourne. This prolonged path to homeownership forces many young adults to extend their rental periods or reside longer with their parents to economise.

As parents ponder the best ways to assist their children in securing a foothold in the property market, it’s essential to consider the financial strategies and implications carefully. Whether it’s through providing a cash gift, setting up a loan, or other means of financial support, understanding the options and their impacts is critical.

Let’s look at these in turn…

The Pros and Cons of Financial Gifts

Many parents opt to give cash gifts towards their child’s deposit or mortgage—a straightforward and effective way to provide support. However, these gifts come with their own set of challenges:

  • Verification Requirements: Lenders may scrutinise these gifts, requiring proof that they are genuine gifts and not loans that need to be repaid.
  • Divorce or Separation: If your child divorces, the gift could become part of the property pool that is divided between the couple.
  • Tax Implications: Typically, gifts from family members out of natural love and affection are not taxed, but it’s important to consider all potential implications.

The ‘Bank of Mum & Dad’ Loans

If instead of a gift, you choose to loan money to your child, documenting the terms clearly, preferably with legal assistance, is crucial. Loans can be structured in various ways:

  • Repayment Conditions: You might require regular payments with interest, or that the loan be repaid upon the sale of the property or a change in ownership.
  • Estate Management: The loan could be managed through your estate upon death, potentially being offset against the child’s inheritance or forgiven entirely.

The Risks of Acting as a Guarantor

Providing a family guarantee can help your child avoid lender’s mortgage insurance, but it also places significant financial responsibility on your shoulders. If the child defaults, you are liable for the amount guaranteed, which might even necessitate selling your own home to cover the debt.

Co-Ownership: Joint Ventures in Property

Buying property with your children can be structured as either joint tenants or tenants-in-common, each with distinct implications for ownership and inheritance:

  • Joint Tenants: Ownership is divided equally, and upon death, the deceased’s share automatically passes to the surviving owner(s).
  • Tenants-in-Common: Allows for unequal ownership shares and the deceased’s share is distributed according to their will.

Utilising a Family Trust

A more complex but often advantageous strategy involves purchasing property through a family trust. This approach can provide significant asset protection and potential tax benefits, though it comes with its own set of regulatory considerations, especially concerning CGT and potential state taxes.

Reduced or Rent-Free Living Arrangements

Allowing your child to live rent-free or at a reduced rent can provide immediate housing relief but does not aid in building their credit or equity. If the property is considered an investment, you must charge market-rate rent to claim tax deductions appropriately.

Conclusion

Helping your child to purchase a home is a noble gesture that can significantly impact their future. However, it’s essential to balance generosity with financial prudence. Always plan for the worst-case scenario and seek professional advice to ensure that any assistance you provide is both beneficial and sustainable.