It’s easy for parents to support their kids when all it involves is cheering for their sporting team or helping with homework, but it gets more complicated when children grow up and want to buy a home.
It takes first homebuyers an average of 9.5 years to save a 20 per cent deposit for a house in an Australian capital city, according to the “ANZ Housing Affordability Report ”.
With such a long delay, some parents want to help their kids to buy property. This might mean bringing forward an inheritance, helping with the mortgage or co-investing to buy with the child.
The joy of giving
A cash gift may seem like an obvious option, but there can be complications, financial coach Matt Hern warns.
For example, gifting can affect the parents’ Centrelink entitlements, Hern says.
In addition, if the child is in a relationship that breaks down, the former partner may take half the money and the parents would be unable to recover the gift.
“As clinical as it may feel, it would be worth documenting the gift as a formal loan – and not on a scrap piece of paper,” Hern suggests.
A legally documented loan would allow the parents to recall the money if necessary, even if they never intend to ask the child to repay.
Some families club together to buy property.
Parents cannot use their self-managed super fund (SMSF) to buy their child a home as this would breach the sole purpose test, but they can use personal assets if they have enough available.
Family members buying together should be listed as tenants-in-common on the property title to clearly identify the portion each owns, Hern says.
Also, he recommends they prepare an exit agreement that outlines when and how the property can be sold.
“If you can’t agree on what conditions to put into an agreement, you probably won’t be able to agree in the heat of the moment when one of you wants to sell and the other doesn’t,” he observes.
Buying through a property syndicate can avoid arguments. The syndicate owns the property. Investors own units in the syndicate, which they can sell to other investors without having to sell the property.
For example, families can buy together in a syndicate-style arrangement using DomaCom’s fractional investment platform. The platform provides a secondary market for trading units in the property, DomaCom chief executive Arthur Naoumidis says.
Parents may be able to use their SMSF to invest in a property and have their child become the tenant if they buy through the DomaCom platform and follow an appropriate procedure, Naoumidis adds.
Under this arrangement the SMSF identifies the property to buy and then informs DomaCom. The manager purchases the property in a sub-fund on its investment platform and investors – the SMSF and others – buy units in that sub-fund.
From a compliance perspective, SMSF trustees need to make a sole purpose test declaration at the start of the process.
“They’re saying they’re investing for the purposes of retirement benefits and they can’t influence the property manager as to who the tenant is,” Naoumidis explains.
“Once we acquire property, we appoint a property manager and this person goes out to find a tenant.”
Anyone, including investors, can apply to rent the property. The property manager is instructed to select the lowest-risk tenant.
“Clearly a shareholder in the fund is lower risk because they’re going to look after the property,” Naoumidis notes.
DomaCom has recently launched a rent-to-own model families could use to jointly invest in newly developed homes.
The company has negotiated with developers to provide a 10 per cent rebate of the property’s value on settlement. This 10 per cent represents the amount the developer would typically pay to marketing companies and real estate agents to sell the property.
DomaCom passes 5 per cent of the rebate to investors in the product and the remaining 5 per cent to the property’s tenant in increments of 1 per cent a year over a five-year period.
SMSFs are able to invest in rent-to-own properties. Fund members and their relatives can apply to become the property’s tenant as the SMSF owns units in a sub-fund and not the property itself.
“Just make sure your child is an investor in the campaign because then when we go to find a tenant, they will naturally rank above everyone else,” Naoumidis advises.
As the tenant, the child can increase their stake in the property over time by buying units on the secondary market. In addition, parents can sell their units if they need to redeem their investment without selling the property.
The company’s first rent-to-own transaction involved a one-bedroom unit in Melbourne’s Moonee Ponds for $447,000. It worked with the developer to secure this property, but Naoumidis says investors can source new properties for themselves as long as the developer is willing to use DomaCom’s model.
Parents who don’t want to provide cash upfront may consider guaranteeing their child’s mortgage, Hern says.
This can allow the child to buy with a small deposit and avoid lenders’ mortgage insurance (LMI), which can add thousands to the cost. Most lenders require LMI if the deposit is less than 20 per cent of the home’s value.
As guarantor, the parents hold up their assets as security for the child’s mortgage. If the child defaults on the repayments, the parents, as guarantor, are liable for the debt.
Some mortgages allow family members to limit the value of the guarantee – to make up the balance of a 20 per cent deposit, for example – but others require guarantors to underwrite the entire loan amount.
“If they want you to guarantee a full loan, don’t do it. It’s way too risky,” Hern advises.
According to Relationships Australia chief executive Elisabeth Shaw, whatever mechanism the parents use to help their kids, they should clarify their goals and consider family dynamics.
“We see a lot of people who get into difficulties because they didn’t think those things through,” Shaw says.
She recommends parents document their reasons for giving, beyond simply wanting to help their children.
“If it is also: ‘I hope I’m buying a good relationship or I hope I’m buying visits in the nursing home,’ it’s good to name those things,” she says.
Parents may feel bitter if outcomes are different from what they expected. Discussing upfront what parents are offering and what they expect in return can help prevent issues arising.
“You might want to offer your child something really specific: they want a house and you help them, literally, get a house. If you give them money and you hope they buy a house, it’s quite possible they’ll buy a boat,” Shaw says.
If parents are co-investing, they could expect significant input into any purchase decisions, but imposing too many conditions can spoil a gift.
“The child can feel controlled by the gift rather than really valuing it,” Shaw warns.
Parents with more than one child should stay true to their parenting philosophy. Siblings who expect to be treated equally may feel resentful if they believe they are being disadvantaged.
“Stay alert to the principles of fairness and justice and talk transparently about that,” Shaw suggests.
“It’s okay for parents to make an exception, because it is ultimately their money, but they can’t give money expecting that everybody will agree with their decision.”