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How can parents assist their children to purchase a first home?

Nov. 2021

You want to help your child into their first home, but you also want to protect your own interests. So here are two ways that you might think about doing it.

Provide a loan:

It is usually more favorable to the parent if you loan the money, rather than gift it. The advantage of a loan is that it creates an obligation on the Borrower/child to repay, even if, as is usually the case, the parent is unlikely to insist on the loan being repaid. A loan is usually better if there are relationship property dynamics with your child's partner since the loan is not relationship property, whereas a gift will be relationship property unless a contracting out agreement is signed (between your child & their partner). If your child is buying the house with their partner, then it is usually better to do the loan to both (if they split up then they're jointly responsible to repay).

A challenging dynamic with interfamily loans is getting the bank to agree because usually there is also a bank loan/mortgage involved. The banks will usually insist on approving the form of the interfamily loan before approving the bank loan. You have to draft the interfamily loan document so as to not step on the bank's toes. Some of the tensions:

  • The banks usually don't want the parents to register a mortgage (or have the right to do so) over the property in respect of their loan (unless the bank has been repaid first).
  • The banks don't usually want the parent lender to have the option of charging interest on the loan because it affects the borrower's serviceability calculations/amount the bank is willing to lend (although there may be ways of dealing with the interest issue that don't affect this).
  • Usually the borrower needs 20% deposit in the property according to Reserve Bank LVR standards (otherwise it is a low equity loan which is harder to get or attracts higher interest rates). So, for example, if the property was worth $1,000,000, then the borrower/buyer needs $200,000 of deposit. If your child had $100,000 and the parents were lending $300,000, then the first $100,000 of the parent's money would need to be a gift so that there was 20% equity. This can mean you have a split loan/gift situation.

A lawyer can be helpful in terms of negotiating with the bank, around the terms of the loan, and ensuring the parent's funds are appropriately protected.

Joint ownership:

Another option is where you buy together as parent and child, with (for example) a half share each. The advantage of this is that the parents' names would be on the title, so it's a very safe position. Also, when the property is sold, providing the property prices go up (which they seem to do usually), then the parents would get a share of the capital gains.

The challenge here is aligning the interests of parent and child. For instance, if the child is living in the property, but the parents aren't, then the tax position of parent and child could be different. In such case, if the property is sold within a certain timeframe, the parents could pay capital gains/bright-line tax but not the child, which creates an obvious tension.

It would be essential that the parents and child, and possibly the child's partner, enter into a property sharing agreement which would specify (amongst other things):

  • Either party can demand sale of the house after a certain period, for example 10 years, but not before, and the priority of payments from the proceeds of sale.
  • Who pays the mortgage? As both parties are on the title, then the bank would almost certainly insist on the parents being a joint borrower or a guarantor to the borrowing. Often the children will undertake responsibility for bank loan repayments, and parents would have an indemnity from the child.
  • Arrangements as to who takes care of/pays for utilities on the property, maintenance, any improvements to the property.

Nothing in this article should be construed as giving legal advice. It is a short summary and there will inevitably be other details and tailoring to individual circumstances.

If you would like to discuss about buying a property in these circumstances, then we're more than happy to help.

Written by Blair Franklin (Property & Commercial Partner).