How can mum and dad help me to buy a house?

The Prime Minister Malcolm Turnbull says parents should assist their adult children to break into expensive property markets. Without assistance, young Australians struggle to achieve home ownership, especially in Sydney, Melbourne and Brisbane. What makes the problem worse is rising house prices. Property prices are going up faster than the inflation rate. That makes the job of building up a deposit very difficult.

Lenders say that, increasingly, first home buyers are receiving assistance from their parents or other family members. But what is the best way for parents to help kids buying a home? By guaranteeing a mortgage? By taking out a mortgage for the kids? By handing over cash? By having some kind of joint home loan? The answer depends on your own particular set of financial and family circumstances. Let’s have a look at the options:

1) Gifts of cash from parents to children:

Gifts of cash are legal and there is no tax on gifts. But parents should consider that the gift will still be counted as an asset for Centrelink’s age pension assets test, even five years after the gift has been made. Financial adviser Daryl Dixon told Fairfax media this week that the tightening of the age pension assets test made cash gifts more attractive for middle income retirees. The cash gift can be counted as a relationship asset and divided up in divorce or family court settlements.


2) Loan from the Bank of Mum & Dad:

To avoid any complications arising from a cash gift, some parents opt to provide their adult children with an interest-free loan. That means the home buyer doesn’t need to borrow so much from the bank or credit union to cover the purchase of the property. But the money isn’t a gift, so it can’t be divided up in a divorce. It remains an asset owned by the parents.


3) Mum & Dad buy the property


Some parents are directly buying a property for their adult kids, negatively gearing the purchase and renting it to their children. This is only allowed if market rent is charged on the property. This is a good option for parents with large tax bills and healthy cash flow. Capital gains tax would be payable on a property purchased and used in this way.


4) Mum and Dad buy into the property


Some lenders are offering and allowing parents and family members to take out joint loans or even separate loans to cover the cost of buying the property. This can take loan servicing costs right down and help young people get approved for a loan.


5) Loan guaranteed by Mum & Dad


Loan guarantees are sometimes said to be the riskiest way for parents to help their children get into the property market. It means that in the event of a loan default, the responsibility for repayment transfers to the guarantor. In extreme situations, the guarantor’s own home could be sold to repay large debts. This is unlikely but possible.


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