With prices subdued, now is also a great time to help your kids buy a property in order to secure their financial futures. You may be keen to free up some space in your house, or downsize into a more manageable property. To do so, you need to evict the adult kids!
Many twenty- and even thirty-somethings have felt despair over the last few years as property prices have raced up faster than they can save for a deposit. However, the number of first-time buyers doubled in 2018. It appears many are now returning to the market as Sydney property prices appear less daunting.
How you do this will depend on your own situation. Obviously it’s not something that every parent is in a financial position to do. However, if you have been thinking about it, here are five ways to help your child buy a property.
1. Loan them the money
A family loan can come from your own cash or money you have borrowed. However, this will be considered debt and will therefore reduce your child’s overall borrowing power.
2. Gift the money
Either in full or towards a deposit. In this case, you need to declare any money you give as a financial gift. You will need to provide a statutory declaration stating that the money is not repayable. Lenders will want to know where the money has come from if it’s included in the application.
3. Buy a property with your child
A joint venture is where parents own a share of the property. This means lenders will include your income in the calculations, and you’ll have to go through the loan application process and prove your income and assets.
4. Guarantee the mortgage
This is when your home or other assets are used by the bank to guarantee the loan. If you are going to act as guarantor, be aware that should they fall behind in their repayments you will be liable. Taking out insurance can allay some of this risk.
5. Start with an investment property
This can be a way of getting into the property market while prices are subdued and building up some equity. Your child may still be able to claim the first home owners’ grant when they eventually buy their own home to live in, as long as they haven’t lived in the investment property for a continuous period of six months.
Alternatively, you could buy an investment property yourself for your children to live in, and charge them rent. Remember though, that if you buy in your name, you’ll be eligible for capital gains tax should you sell or transfer ownership to your children.
What else do you need to consider when helping your kids buy a home?
The most obvious factor when buying property is always budget. As well as the purchase price of the property, you’ll need to factor in conveyancing, stamp duty, plus any renovation costs. You will need mortgage insurance if you have a deposit that’s less than 20% of the purchase price.
Look into any assistance available, such as the First Home Owner Grant. This is offered for newly built or substantially renovated homes, or land to build a house in NSW. As a first time buyer, your child may be eligible for a full or partial exemption on transfer duty. Check the website for eligibility requirements.
Other things to consider
Whatever you do, make sure everyone is clear about exactly what is being offered. If you are lending money, when do they need to start paying you back? What happens to the money if they sell the property?
Always bear in mind that you still need to have enough money yourself for retirement, so don’t commit to anything that will leave you stretched. And if you have more than one child, remember that if you loan money to one and not the other it can lead to sibling rivalry!
Talk to the experts
Whatever you choose to do, be sure to consult with a tax advisor or accountant so you know exactly where you stand. Good luck, and please contact us if you are thinking of investing in Sydney’s current market and would like to know what the market is doing.