In today's housing market, with skyrocketing property prices, particularly in cities like Brisbane, many young people are turning to their parents for financial assistance in purchasing their first home. Interestingly, parents are quickly becoming one of the country's biggest lenders, often referred to as the "Bank of Mum and Dad." While helping your children buy their first home is a milestone many parents dream of, it’s important to carefully consider the risks and benefits.
Providing Family Support: The Bank of Mum & Dad
When helping your child buy their first home, family support can play a crucial role in getting them on the property ladder. However, gifting a large sum of money, while generous, can come with significant risks for both you and your child. As parents, it’s essential to consider how such a financial gift might impact your long-term financial security, particularly your retirement plans. Additionally, there can be legal complications or unintended tax consequences for your child if the gift isn’t properly documented. Before proceeding, it’s vital to understand the legal, financial, and emotional implications to ensure both parties are protected.
The Do’s
Do understand tax implications
You should consider the implications for any means-tested government benefits (e.g., Age Pension) that you or your child might be entitled to in the future.
Do prioritise your financial security
Make sure you’re not compromising your own retirement savings by gifting a large sum.
Do consider tax-free savings opportunities
In some cases, you may be able to reduce tax by giving money in a way that takes advantage of tax-free allowances or through superannuation to reduce your tax liabilities or improve estate planning.
Do communicate the gift clearly to all involved parties
Lenders often require a formal letter stating that the money is a gift and not a loan. Make sure you provide the necessary documentation to avoid delays in the mortgage approval process.
The Don’ts
Don’t forget about Centrelink implications
For those receiving Centrelink benefits, gifting large sums of money can impact your entitlements. Make sure to check this so as not to affect your benefits.
Don’t co-sign or take out loans on behalf of your children
Co-signing on a mortgage or borrowing against your own assets may seem helpful, but it puts your own financial security at risk. If your child defaults, you could be left responsible for the debt.
Don’t ignore the potential impact on your child's future tax obligations
If the property appreciates in value and your child sells it, capital gains tax (CGT) could apply depending on their residence status and property use.
Helping your child purchase their first home is a generous and rewarding gesture, and with careful planning, you can ensure it benefits both your family's financial future and your child's long-term success.
Are you looking for further advice? Get in touch with us today on 1800 988 522 or finance@cutcher.com.au
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Dean is the head of the Residential & Commercial Finance division at Cutcher & Neale. With over a decade of experience previously working within the private banking industry, he enables the firm to provide independent, dedicated and personal finance solutions to clients.
Dean specialises in finance solutions such as home loans, investment loans, refinance, commercial loans and bespoke lending for certain professions.
