In a manner that no one could really have predicted, residential house prices are soaring around Australia. Clearance rates are up and two weeks ago the ANZ Bank tipped an average increase in house prices of 17% for 2021.
This is good news for property owners – and especially property investors who own property that they do not live in. But the news is not so good for people not currently in the market – people looking to buy their first home, or people who are out of the market for other reasons, such as returning expats. These people are seeing the price of their prospective purchase increasing at a much faster rate than they can save.
Five years ago, having just left his post as the Governor of the Reserve Bank, Glenn Stevens observed that it was almost impossible for a young first home buyer to buy a house in Sydney (where he lives) without parental support. That was before interest rates dipped so dramatically and the current run-up in house prices started. Things have only gotten worse since, and the problem has spread from Sydney to affect residential property all around Australia.
As a result, the ‘Bank of Mum and Dad,’ (or Grandma and Grandpa, or Aunty Linda and Uncle Rashid), is something that more and more people need in order to make a property purchase. This raises the question for those family helpers: what is the best way to help their adult ‘kids’ buy a home?
There is more than one way to answer this question. But the general point is that there are right ways to help and wrong ways to help. In general, simply giving money to ‘the kids’ to assist them to buy a house is not a good idea. A gift of money becomes theirs – which means it is theirs to lose if something ‘goes wrong.’
A simple example of something ‘going wrong’ is if the young person’s relationship ends. Consider an easy to imagine situation: a young woman gets married and her parents gift her $100,000 to put towards a home purchase. After a few years, she realises that she and her partner are not that compatible, and they decide to separate. They agree amicably on a 50-50 split of their net assets. So, they sell the home, repay the bank and then divide the remaining assets 50-50. This means, of course, that half of the $100,000 gift goes to the now-ex son-in-law of the older couple. Because the money was simply given to the daughter, it became equity when she used it to buy a home.
Similar things can happen if the recipient has a business that goes bad or something along those lines – any outright gift becomes the recipient’s property and this means it can be lost if someone has a claim against that recipient.
A better way to go is usually therefore to provide the financial support as a loan. In this way, if something ‘goes wrong,’ such as a relationship ending, the loan needs to be repaid before any remaining net assets are divided. In the above example, this would mean that the parents get their $100,000 back (maybe even with interest) before the separating couple divide what is left.
Precisely how to make the loan is a matter for individuals and so we will not be too prescriptive here. There is more than one way to make things work. But it is very important that things are done properly, so at a minimum the family should be considering the following:
- Using a lawyer to draw up the loan agreement and to make sure that the arrangement is legitimate and correct;
- Talking to the recipient’s main lender (generally a bank) about what impact the family loan may have on the ability to borrow from the bank;
- Any impact making the loan might have on the parents’ assets, which may be an issue for things like Centrelink or, at some stage, residential aged care;
- What will happen if the parents’ situation changes and they need their money back (for example, if they experience a health event, or another ‘child’ requires support, etc); and, very importantly,
- When and how the loan will eventually be repaid or otherwise ‘finished.’
We can help you make sure that any assistance you give to (or receive from) family is provided as safely as possible. So, if you or someone you know is looking for the best way to get into or back into the property market, please get in touch.