More parents are helping their children financially to get ahead.
So what are some of the considerations when gifting or lending money to ensure everyone’s interests are protected?
The ‘Bank of Mum and Dad’ now helps the majority of first home buyers get onto the property ladder.
It’s an act of generosity that can come at a price if it’s not done in the right way.
Every parent wants to see their children get ahead.
It’s one of the reasons so many parents help their children financially when it comes to buying a home.
In 2021 Australia, more than half (55%) of first home buyers now receive financial assistance from their parents, and where a cash injection is involved the average amount is $89,000.
This generosity has made BOMAD (the bank of Mum and Dad) the 10th largest lender in Australia, with total loans in excess of $20 billion.
Over the last few years the Government has tightened up some of the rules around contributing money to super, so older people are keeping more of their money invested outside super — where it’s more readily accessible.
Having greater access to cash might be a good thing when it comes to helping out your kids, but it can also have a negative impact on your own retirement savings.
The downside is that parents might need that money themselves one day — so you need to think about what’s going to happen then.
One of the key things you need to discuss with your children is whether the money is a gift or a loan.
Not only can this help your child plan their future, it can have an impact on your Age Pension entitlements — so it’s worth seeking professional advice to avoid any nasty surprises.
If the money is a loan, you need to determine what interest (if any) will be payable, and how and when the loan principal will be paid back.
Another option might be for a parent to act as a guarantor on a child’s loan, using the equity in their home as security for a child’s mortgage.
This scenario may help your child secure a loan with a lower deposit than they might otherwise need, but it also means you’re taking on the risk of the debt and the repayments yourself.
Whatever arrangement you decide on, you absolutely must make sure it’s properly documented so there’s no confusion over how it’s going to work.
This can help avoid any misunderstandings or potential disputes later on.
For parents with more than one child, an overlooked issue is how to achieve a fair outcome for all children.
This can be particularly difficult when there are children from different relationships, or when some children need more financial support than others.
You might have one sibling who is ten years older and was able to get into the property market when affordability wasn’t as much of an issue as it is now, or you may have one sibling who is not as financially responsible and needs a bigger helping hand.
This is where communication is so important — if there’s a reason you’re treating siblings differently, let them know why this is the case and give them an opportunity to share their opinions on the topic.
When lending money to your children, there’s always the risk they won’t be able to pay it back when you need it.
That risk can be even greater if they don’t have income protection insurance or private health insurance.
Often young people jettison insurance at the first sign of financial stress. It is not a high priority for them.
But if that child loses the ability to work, it could make it even harder for them to repay their debts.
That could be a double whammy for parents who have already lent children money, but may need to provide even greater financial support to protect the investment, and to keep the child off the streets.
Paying for your child’s income protection insurance could be one way to protect their lifestyle, and ultimately your own.
It is important that both you and your child get professional advice.
Five tips to make it work
- Talk it through — make sure everyone in the family is clear on how the arrangement is going to work.
- Put it in writing — get your estate planning lawyer to draw up the proper legal documents that outline the terms of the gift/loan. Make sure you and your child have valid and up to date Wills that cover the gift/loan. Don’t trust this to a DIY kit Will.
- Protect the arrangement. Secure the gift/loan. Consider paying your children’s income protection premiums
- Be cautious. Take professional advice yourself BEFORE you commit to anything.
- Help your child plan for the future — encourage your children to seek professional advice.
Be cautious, and take advice before you decide.
When it comes to Wills, asset protection & estate planning in Australia, you can trust the oldest law firm in South Australia, Genders & Partners to guide you through the tough decisions you must make for your family’s future care and welfare.
If you have any questions, or would like further information, please call or email us.
Would you like a quick phone call to discuss? Feel free to phone or email us or use this link and book a timeslot for a free 15-minute phone consultation on my schedule: https://calendly.com/genders
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Call us on (08) 8212 7233 to enquire further.
We can help you to protect yourself and your family. We look forward to being of service.
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