Properties in every Australian city have gone up to astronomical values.
The same has been happening in a country,
and if you believe our property market is dramatically overpriced
and if you are waiting for a huge shake-up, so your children can buy their family home
at the much lower price, I don't think this is going to happen.
Australian property prices might drop by 10% or so
and then it will continue its usual upwards trend again in some point in the future.
This is what property experts predict.
With an average property price in major Australian cities close to $1M,
and regional dwellings over $600K, obviously there are some discrepancies between Australian states,
but it is becoming harder and harder for your children to enter the housing market.
So no wonder, that many parents are contemplating helping their children.
But a simple act of trying to help your children to buy their first family home
can have incredibly negative impact on you, if done incorrectly.
And this is exactly what we are discussing today.
My name is Katherine Isbrandt from About Retirement. I'm Certified Financial Planner,
and you are watching About Retirement TV, the place to get all the information you need
when getting ready for your retirement.
So if you are in your 40s, 50s, 60s, and you are trying to pre-plan your future retirement you are in the right place.
But this is also for you if you have already retired
and would like to find ways of improving your retirement, income, assets, government support,
but also, all the other financial and life problems you might face in that phase of your life.
There are a number of issues you have to review and research before you proceed with any financial support for your kids,
especially when considering a property purchase,
which requires a major financial commitment or expense on your part.
1. Do not gift the property
Never, ever give your kids the full ownership to the property as a gift.
You have just taken away the main part of learning of how to become a responsible adult
I know that sometimes it is a cultural thing but we all need to learn how to budget,
how to be responsible for our mortgage, how to live within our means,
not to mention the personal satisfaction of self-achievement.
We don't value things given to us, as much as what we personally achieve
through hard work, dedication, and daily responsibility.
Helping and caring is one thing but giving it all on the platter is not character building,
and can actually create more harm than good in the long run.
2. Family dynamics
If you have more than one child, then financial assistance might be a little bit more difficult or more complex.
You need first to consider if you are able to provide a similar assistance to each of your children.
You cannot help one and not the other, that is just creating a family conflict and resentment.
If one child has a particular problem now and you feel that your help is more appropriate there,
then, have an open conversation with your children to let them know and make an agreement,
than the other child knows, that he or she will be compensated later on.
Your financial help needs to be fair, whether you are assisting now,
in years to come, or through the Will on distribution of your estate.
But all parties involved need to know it and agree to it, so there is no hard feelings between family members.
Sometimes I do hear parents say: I will help my daughter because she is close to us,
she is staying in touch, she cares, but we don't want to help our son, who is a disaster of a person,
moved out, he doesn't even bother to call and see how we are doing.
I can understand how you feel, but from the legal standpoint,
both children have to be treated equally, and if you help one, or even worse if you leave your full estate to one child
and not the other, this is a legal challenge waiting to happen.
So always be fair and open to protect your family relationships.
3. Financial strategies to help
Let's now go over strategies that are available to you,
if you wish to assist your children in buying their first home.
A gift.
This is most likely the simplest way to provide financial assistance to your children.
Generally, there are no tax consequences, you don't need to set up any legal structures,
but once you give the money, it's gone, so don't include it in your retirement planning later on
Please think twice, however, before giving money away,
as I know many retirees, who regret that decision in later years of their lives.
The main issues are:
Well, you may run out of money and you may not afford the lifestyle you used to enjoy before.
A big drawback is if your child's relationship breaks down.
Be aware that your child's partner will be entitled to half of that money that you gifted
If your child is running a business and the business fails,
then, there is a very high probability that creditors will be entitled to your money.
So in most cases, gifting is nice and easy but you have to be aware of all those risks.
Loan.
This is a very similar option, but at least there should be a legal agreement between you and your child.
Agreements should specify all agreed terms of the loan such as for example,
level of repayments. Well if you don't want to receive any repayments you can do that
but it is still an option and it should be listed in the agreement.
Interest rate - if you want to charge interest rate you can, but you don't have to.
Repayment term - you can specify the time when the loan is to be repaid in full or in parts.
This is your private agreement, and you make up the rules
but the biggest benefit is that you have the right to recall the money and it is one simple trick
to keep money within the family unit, in case of your child's marriage ending in divorce.
And you can forgive the loan on your death - this is another option available to parents.
The main drawback of the loan is that it has to be a legal agreement, which might be a little bit costly exercise,
but if you don't do it, the whole idea to help children might end disastrous for you.
And then you can become a guarantor.
Very often parents would like to help,
but they don't have enough cash sitting around in a bank account.
And please do not withdraw your life savings from your superannuation fund,
this is your retirement income stream.
Therefore, another option to use is yours - meaning parent's family home - as a guarantee for children's home loan.
If they don't have sufficient deposit.
But before you jump in to this option, always be aware of drawbacks and consequences:
If your child for example cannot meet loan repayments, you will be required to meet them.
You might be even required to pay off the loan in full, if your child defaults.
Therefore, before you jump into setting up this solution,
first, you should really check how responsible your child is with money and with savings.
Also, and this should be imposed on your children,
to have appropriate insurance in place, to cover the outstanding loan with you as the beneficiary of life insurance.
Another policy to insist to be put in place is income protection and disability cover.
This way if any health or life drama strikes, at least finances of both parents and children
will not be sacrificed or diminished altogether.
Then you face a similar problem as discussed before in gifting money to your children.
If you become a guarantor and the property is purchased on both names:
your child's and partner's name, if that relationship fails, your child will lose half of the house
but you, as a guarantor, will remain liable for the full value of the loan.
Obviously, don't forget that becoming a guarantor will reduce your own capacity to borrow,
hence, if later, you would like to buy a new car, rental property, or borrow funds to fix your family home
you might find additional borrowing quite challenging if not impossible.
And then there is an option of buying together.
Some parents are very happy to buy a property together with their child as a joint ownership,
either directly on their name or through their family trust structure.
The idea is that the child will slowly over time or later in life in one lump sum,
buy out the full property to take on the full ownership of that property.
The problem in here is, well, your child will not be eligible for the first homeowner grant.
Also, on transfer of property to the child later on in life, parents will have to pay Capital Gains Tax,
which might be quite considerable due to property growth over time, and it might come at the time,
when you have already retired and it might be a bill you just simply cannot afford.
Also, the property transfer could be subject to Stamp Duties, another unintentional big bill to pay.
4. Other issues to consider
As you can see each option has some negatives, so I suppose your job,
is to do your due diligence of which one of that options is the most suitable
has the least negative impact on you and your future financial plans.
Before you start setting everything up, first, consider doing the following;
1. Have an open conversation with your child or your children about your situation
and all points mentioned today, together with all the negative impact such assistance may have on you.
2. Get proper legal advice
3. Get full financial advice, not only about "How I can help, but also how to protect myself"
as well as if you are nearing retirement and you wish to be eligible for Age Pension,
each of those options will have a different impact on your Age Pension eligibility.
This will be explained in a separate video.
4. Discuss with financial planner all essential life insurance policies your child needs to have in place.
This will introduce financial security for both of you.
Wow, this was a very heavy subject, but necessary to discuss and explain, as I see often mistakes that parents make,
they want to assist their children, help their children,
and later on, they end up with negative effects that will impact the rest of their lives.
This is obviously still a very general explanation as every situation is different
therefore, I strongly, strongly recommend to always receive a proper professional advice
to mitigate any possibility of things going wrong.
If you found this video a bit confrontational
I'm very happy, as it means it opened your eyes to things you might have not considered before
Feel free to leave comments or questions below my video, I do try to reply to all of them as soon as I can.
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For more information on pre and post-retirement-related issues check out my website
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And now my video recommendations: the first lot of videos are all about the most efficient way
to get ready for your dream retirement, all you need to know about savings in super
and it starts with a video "How to Salary Sacrifice to Super"
The second recommendation is for you if you have already retired
full list of my retirement videos
with the first one being the most-watched:
"9 ways to hide money from Centrelink"
So keep watching and learning. See you in my next video. Bye.