How to help your children enter the property market
We have recently had a large number of enquiries from clients looking to help their children enter the property market.
Many parents are motivated by the fear of their children needing to move away to less expensive locations taking their family, in particular their grandchildren with them.
David, Steve & Mitch Cleary who run Allan Hall Finance have developed a number of strategies to fit different client situations, most of which involve helping parents to finance this shortfall when their child does not have sufficient funds to meet the 20% deposit required by banks for a loan.
The advantage of Allan Hall Finance is we can combine the finance with the best tax strategy to achieve the optimal outcome.
Our strategies include:
Parent to Child Loan
This is a formal legally binding agreement or arrangement, prepared by your lawyer, where you lend your child money for the 20% equity. Terms are agreed to at the beginning, including interest rate, repayments, etc.
Advantages – The terms can be flexible and as commercial as you like. Your assets, savings and credit rating are protected as you are not the borrower. By having a formal loan agreement, your child is protected in the event of marriage breakdown.
Disadvantages – You are providing real funds
Parent to Child Loan Funded by Parents Bank Facility
This is a simple variation to the above with funds for the deposit provided by your bank facility.
Often the loan is serviced by the child with the loan paid down aggressively, while the main loan is initially interest only or paid over a longer term.
Family Guarantee Loan
This is a 3rd variation where the top up loan is in the child’s name with the parents guaranteeing and providing security for the top up loan only.
The advantage is there is no doubt that this facility is to be serviced by the child and the parent only has involvement if there is a default and then only in respect to this guarantee loan.
Not all, but most banks provide this facility.
Co-Own the Property with your Child
You can assist your child secure a loan if you join in as a co-owner and borrower. This means you are equally responsible as your child for the loan. You can also have flexibility on the percentage of ownership. The lender will consider the personal financial position of both you and your child, which could make the loan application stronger.
Advantages – Your child could obtain a property and loan with minimal deposit and low income.
Disadvantages – If your child stops making the loan repayments, you are responsible for them. You may pay capital gains tax on sale while if the property was in the child’s name that may not be the case.
You can simply give your child the money they need for the deposit shortfall to purchase the property, with no agreements and no expectations for the money to be repaid. A lender may require you to sign a letter saying the money is a gift and not a loan, as the lender will not need to allow for this amount when assessing repayment capacity.
Advantages – You can provide financial assistance, possibly without the need for legal, tax or financial implications of a formal agreement.
Disadvantages – If your child has a spouse and the relationship breaks down, there could be financial and legal implications.
With record low interest rates and relatively high rents, many people can afford to buy a property and rent it out to service the loan. The top up from their wages net of tax is often more affordable than you would expect.
If a child moves into the property for a period and then moves out to earn rent, they may be capital gains tax free covering absence from the property up to 6 years.
We have also had a number of clients purchase property outside Sydney as an investment, which is more affordable with no intention of living in it. This strategy enables the child to build equity and save by paying some of their disposable income into the loan.
Please contact Steve, David or Mitch Cleary at Allan Hall Finance if you would like more information on how to help your child enter the property market. To speak to them directly, please call Steve – 0416 530 584, David – 0425 323 023 Or Mitch – 0412 038 205.