Helping one of your children with a home deposit

From
Brian Hor

Brian Hor

More parents are contemplating helping children enter the home market.

Whilst the banks are starting to relax their lending criteria, with the now sky high prices of real estate in the major capital cities, the “Bank of Mum and Dad” is still very much in demand.

But don’t just give them the money! There are real risks in doing so, such as:

  • The “King Lear” trap – remember him? He gave his kingdom away to his daughters in return for their promises of love and when they got what they wanted they dumped him (more or less). Don’t let that happen to you!
  • Relationship breakdown – what if you give your money to your child and they go through a relationship breakdown? When the dust settles, will half the money (or more) go to their ex?
  • Creditors and predators – these days young people are increasingly striking out on their own, whether as a side gig or as their main occupation. But if bankruptcy befalls your child – or they fall victim to a frivolous (but successful) lawsuit – your gift to them may be exposed.

Lend the money with a proper written loan agreement … Just like a bank

Instead you should lend the money to your child – with a proper written loan agreement, secured by a registered mortgage over the home. Just like a bank.

Even if you can’t get a first mortgage (because the bank will want that), you can usually get a second registered mortgage (meaning that once the bank is paid out, you’re next in line).

Whilst your child might prefer a straight out gift, you’re still helping them out in a big way, and importantly it means three things:

  1. Just like a bank, you are their lender, and you can call in the loan if they default.
  2.  If your child suffers a personal financial crisis such as a business failure, lawsuit or relationship breakdown, the amount of the loan (possibly with interest) can be reclaimed by you.
  3. Depending on the terms of the loan, one day you may be able to call in the loan if you need the money for yourself – perhaps to fund aged care.

What if your child has a partner? In this case what you do will depend on in whose name the home will be purchased.

If the home will be purchased in the name of your child alone, then the loan agreement and mortgage will bind your child alone. In this case, your child’s partner has no say in the matter.

What if home is purchased in both the names of your child and their partner?

But what if the home is to be purchased in both the names of your child and their partner? In that case, the loan and mortgage will need to bind both your child and their partner to enable the mortgage to be registered over the home.

You need to protect yourself and in so doing you are also protecting your child, because one day you may well decide to forgive the loan or you may actually give the benefit of the loan to your child in your Will as part of their inheritance.

By Brian Hor, Special Counsel – Estate Planning & Superannuation

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