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With homeownership rates declining and median house prices soaring, parents play an increasingly important role in helping their children secure homes through financial support, loans, or co-ownership. This article explores effective strategies for parental assistance while ensuring financial security for all parties.
Wealth transfer in action
The transfer of wealth from older to younger generations is underway, with homeownership being a pivotal element in this process. With interest rates and property prices increasing, younger generations are forced to chase a deposit goal that shows no intention of staying still.
Meanwhile, according to the May 2024 Property Update, average house prices differ greatly across Australia:
Sydney: $1,627,625 (highest)
Melbourne: $1,032,020
Canberra: $1,049,719
Brisbane: $924,498
Adelaide: $902,332
Perth: $777,921
Hobart: $712,648
Darwin: $573,856 (lowest)
Every average capital city house price shows year-on-year and quarter-on-quarter growth, despite a rising interest rate environment. Without a doubt, as the target cash rate is forecasted to remain at a 12-year high of 4.35% through 2024, the role of parents and families in aiding young adults to buy homes becomes increasingly significant.
Decline in homeownership and the growing wealth gap
Homeownership in Australia has dropped from 70% to 67% over the last 15 years, exacerbating the wealth gap, which is exceptionally concerning given that homeownership is a key factor in accumulating wealth. According to the Actuaries Institute ‘Not A Level Playing Field’ Report, wealth inequality today is more pronounced than in the 1980s, with the wealthiest 20% holding six times the disposable income of the poorest 20%.
For people aged 25-34 and in the lowest income quintile, the outlook is even more dreary. For that segment, the homeownership rate has more than halved in the same period, resulting in significant lifelong inequality. The Actuaries Institute reports that older households who do not own their own home have significantly lower disposable incomes and higher housing costs in retirement than homeowners. According to the New South Wales Treasury (2022), more than one-third (37%) of households over age 65 who are not homeowners live in social or community housing.
The challenge of saving for a home
The Domain’s First Home Buyer Report (March 2024) highlights the time it takes for young couples to save a 20% deposit for an entry-level home:
Sydney: 6 years and 8 months
Melbourne: 5 years and 5 months
National average: 4 years and 9 months
During this lengthy savings period, many young adults find themselves renting or living with their parents, which can strain both personal finances and family dynamics. Rising rental costs, coupled with stagnant wage growth, further complicate the savings journey.
Moreover, the high cost of living in metropolitan areas makes it challenging for potential first-time buyers to accumulate the necessary funds, exacerbating the delay in entering the property market. These financial hurdles highlight the critical need for strategic financial planning and potential parental assistance to bridge the gap toward homeownership.
Parental assistance in home buying - the ‘Bank of Mum & Dad’
Parents often wish to help their children with homeownership when it’s most needed, rather than leaving an inheritance later. However, it's vital to ensure that this support does not compromise the parents' financial stability.
Providing a cash gift for a deposit or mortgage is a common approach, but it comes with considerations:
Loan verification: Lenders may need to confirm that the gift is not a loan and doesn't require repayment.
Divorce or separation: The gift may become part of the property settlement in case of a divorce.
Tax implications: Generally, gifts from family members out of affection are not taxed.
Rather than focus on cash as the only way to help your children buy a home, we recommend framing your arrangement in contractual terms. In this way, every party’s interests are protected.
For example, various legal structures can be used:
Mimicking a bank loan with interest and regular payments
Requiring repayment when the property is sold or ownership changes
Managing the loan through the estate if the parent passes away
We explore some of these further in the next section.
Providing security to lenders (going guarantor)
Parents can act as guarantors to help their children avoid lender’s mortgage insurance (LMI). However, this involves significant risk, as parents might be responsible for the loan if their child defaults, potentially putting their own home at risk.
Alternatively, they may be able to use the equity in their home to help secure their child’s home purchase. But it’s important to understand that the parents, not the child, are legally responsible for meeting the repayment obligations in both of these scenarios.
Co-ownership with children
Parents can co-own property with their children through:
Joint tenancy: The property is evenly split and automatically passes to the other owner(s) upon death.
Tenancy-in-common: Allows for different ownership proportions and the parent's share is distributed according to their will.
It’s essential to have a written agreement outlining the co-ownership terms and addressing potential changes in circumstances and tax implications.
Using a family trust
Purchasing a property through a family trust can offer asset protection. Control of the trust can eventually be passed to the child, potentially avoiding significant capital gains tax (CGT) or stamp duty liabilities. However, CGT will apply on the sale of the property, and tax issues may arise.
Rent-free or reduced rent
Parents can provide a home for their child to live in rent-free or at reduced rent. However, this method has limitations:
Loan security: It does not help the child build credit or equity.
Tax implications: To claim full expense deductions, rent must be at market rates. Any rental income is taxable, and CGT will apply on the sale or transfer of the property.
Seek professional advice
Assisting children with homeownership is a complex decision that requires careful consideration of financial and legal aspects. Whether through cash gifts, loans, guarantees, co-ownership, or family trusts, parents must ensure that their support does not compromise their financial security, including access to the pension or other benefits.
We recommend talking with an experienced financial professional before writing any cheques. Our award-winning broking team is here to provide you with expert advice and answers to any of your questions. We can compare strategies and help you understand all of the pros and cons. Request a meeting now.
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