Our Prime Minister has recently come under fire for suggesting that couples could seek financial assistance from parents to buy property. In fact, my experience suggests this is not uncommon for Australians from multicultural backgrounds, particularly where there is an expectation that the newlyweds ought to establish a new household.
SMH’s Domain suggests a number of ways in which parents could assist their children with buying property. The SMH Domain article may be viewed here.
The aim of this blog article is to explore the ramifications of the main options considered in the SMH Domain article.
1. Cash gifts
Let’s consider the implications of a parent giving a cash gift:
- it is a simple as directing a transfer of cash into the child’s bank account
- it has the immediate effect of reducing the parents’ assets (relevant to retirement planning)
- gifts are typically unconditional and irrevocable – a parent is unlikely to succeed in recovering a cash gift from a child
- in the event of a child’s marriage breakdown, the gift will be viewed as an indirect financial contribution to a marriage by the child but there is no certainty the gift money will be retained in the family of origin
2. Guarantees or family home as collateral
At first blush, granting a guarantee on a child’s mortgage or offering the family home as collateral might seem ideal as it does not involve the parent giving the child cash to facilitate the purchase a property.
However, it has its own dangers, including:
- parents may not necessarily understand or appreciate the legal significance of what they have done; if the child fails to honour a mortgage (e.g. the mortgage falls into arrears, the child enters bankruptcy etc), then the mortgagee can (and will) pursue the parent to service or discharge the mortgage
- a mortgagee’s enforcement of a guarantee or collateral security arrangement may ultimately result in the parents selling the family home to meet their obligations to the child’s mortgagee
- in a worst case scenario, the parent will service or discharge the child’s mortgage and a marriage breakdown occurs at or about the same time; the parent’s valuable financial support is considered an indirect financial contribution to the marriage but there is no certainty that the assistance will be reflected dollar-for-dollar in the child’s share of property on the dissolution of his or her marriage and the parent is unlikely to succeed in recovering the financial assistance in family law proceedings
- it can affect adversely the parent’s capacity to borrow funds in the future
For these reasons, we do not typically recommend parents grant guarantees or offer the family home or other property as collateral for their children.
3. Co-purchasing with children
Initially this may seem an equitable solution for all parties with the parents chipping in to buy the property. However, consider also:
- a mortgagee will typically request all purchasers on title sign the mortgage as borrowers. This will mean the parents can (and will) be pursued if the child and other borrowers default on the mortgage
Typical Australian mortgages are ordinarily “unlimited recourse” loans; mortgagees may pursue borrowers’ other assets such as family homes etc
- depending on the circumstances, it may be necessary to make specific provisions in a parent’s will to ensure the parent’s interest in the child’s home will go to that child
- the parent’s interest in the child’s property is an asset of the parent (relevant to retirement planning)
4. Loans to children / financial agreements
Parents may decide not to provide an unconditional gift of cash to a child and instead provide a loan to the child.
This is not uncommon but there are significant legal and financial issues to consider and address:
- the loan should be documented in writing so that its terms are clear and certain
- to provide the parent with the best security possible, the parent will want to register a mortgage over the property; it will need to be lower ranking in priority as banks will not ordinarily issue mortgages on any other basis
- the parent’s right to repayment of the loan is an asset of the parent and provided it can be proved as a debt and not a gift, it may be recovered by parents in the event of the child’s marriage breakdown (relevant to retirement planning)
- interest income from the loan is included in the parent’s taxable income and may affect entitlement to the pension (relevant to retirement planning)
The breadth of possibilities and consequences discussed above highlight the importance of obtaining professional legal and financial advice before making any decisions to assist children with purchasing a property.
It is beyond the scope of this article to explore additional options for parents wishing to provide financial assistance to their children; there are more advanced estate planning opportunities available and we encourage our readers to contact us to discuss their circumstances.
This article is intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article.
Please feel free to contact us to discuss the article