With soaring property prices and growing cost of living challenges, many parents are exploring ways to help their children purchase their first home. While there are several strategies to consider, it’s crucial to carefully weigh the pros and cons of each, ensuring that the financial impact on both parents and children is properly understood. This article explores various options available, including lesser-known strategies such as using the First Home Super Saver Scheme (FHSSS), alongside other traditional methods.
Gifting Cash or Paying Off HECS Debt
One of the simplest and most common ways parents help their children enter the property market is by gifting cash. This could be directly used as a home deposit or to pay off debts, such as a child’s HECS debt (Higher Education Contribution Scheme). Reducing HECS debt could improve the child’s borrowing capacity by lowering their financial liabilities.
While gifting is straightforward, it’s important to recognise that there are no formal agreements in place when money is gifted. Should circumstances change, such as the breakdown of a relationship, the funds gifted could be lost as part of a property settlement. Therefore, while gifting is an excellent way to support children, parents should always consider potential risks and whether this aligns with their long-term financial and estate planning goals.
Providing a Loan or Guaranteeing a Loan
Another option parents might explore is lending money to their children. Unlike gifting, a loan allows parents to retain some control over the funds. By formalising the loan with written agreements, parents can clarify repayment terms, ensuring there is an understanding of when and how the loan will be repaid. This arrangement can provide a safeguard if relationships change, or other financial obligations arise.
Alternatively, parents might opt to provide a loan guarantee to their child’s lender. By acting as guarantors, parents reduce the child’s need for a large deposit, which can make securing a mortgage easier. However, this does introduce some financial risk for the parents—if the child defaults on their mortgage, the parents could be liable for repayments. Guaranteeing a loan may also impact the parent’s ability to borrow or secure loans for other purposes.
Co-Ownership of Property
Co-ownership is another strategy where parents and children purchase a property together, either through a tenancy in common or other arrangements. This approach can be beneficial, as both parties share the financial burden and asset ownership. However, it’s essential to structure these agreements properly to account for changes in circumstances, including relationship breakdowns or plans to sell the property in the future.
When entering co-ownership, ensure clear documentation of each party’s share in the property and how expenses and future profits will be divided. This strategy can have long-term implications for tax planning, estate distribution, and family wealth, so it is critical to consult a legal adviser before proceeding.
The First Home Super Saver Scheme (FHSSS)
One of the lesser-known options that should also be considered for helping children save for their first home is the FHSSS. This government initiative allows individuals to make voluntary contributions to their superannuation, which can then be withdrawn to help fund a home purchase.
The FHSSS enables individuals to make up to $15,000 in voluntary contributions per financial year and a total of up to $50,000. These contributions are taxed at the usual superannuation rates, which are typically lower than income tax rates. By taking advantage of these lower rates, individuals can boost their savings faster than if they were saving outside of super.
Eligibility criteria must be met to ensure that the withdrawn funds are used exclusively for purchasing a first home. The Australian Taxation Office (ATO) calculates a notional earnings rate on the withdrawn funds, which can result in a lower overall tax burden compared to funds saved outside of superannuation. However, children should ensure they understand the release process and any timing considerations before utilising this option.
Family Trusts and Estate Planning Considerations
For families with more complex financial arrangements, a family trust can be a useful vehicle for helping children purchase property. A trust allows parents to maintain control over the asset while still allowing the child to benefit from the property. However, setting up and managing a family trust requires expert legal and financial advice to ensure it aligns with broader estate and tax planning objectives.
Additionally, any financial support offered to children—whether through gifting, loans, or co-ownership—can have implications for the parents’ estate planning. It’s important to structure arrangements so that they don’t inadvertently reduce family wealth or cause complications in estate distribution later on.
Explore Your Options and Plan Carefully
Helping your children enter the property market is a generous and rewarding decision. However, it requires careful consideration of the financial, tax, and legal implications. Whether you choose to gift funds, offer a loan, provide a guarantee, or take advantage of the First Home Super Saver Scheme, it’s essential to discuss your options with a financial adviser, accountant, or lawyer to ensure the right decisions are made for your family’s specific circumstances.
For more information, please contact Brett Cribb, Steve Nicholas, or James Marshall at +61 (0)7 3007 2007, or email info@stratusfinancialgroup.com.au.
Stratus Financial Group helps individuals, families, and retirees manage their complex financial affairs and coordinate their professional advisers.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation, or needs, so you should consider whether the advice is relevant to your circumstances. Read the relevant Product Disclosure Statements (PDS) before making any financial decisions.