Opinion
Giving money to your kids? Here’s how to avoid catastrophe
Nicole Pedersen-McKinnon
Money contributorHi Nicole, I have a fully paid off, large house and a bit (not a lot) of ready cash. I also have two adult children. My son and his wife have bought their own home, but my daughter is struggling to save a deposit, as prices keep slipping away from her. I would like to help my daughter buy her first home but don’t know how to do it without a) leaving myself short and b) risking that money should she decide to move in with her partner and that go south. But I also don’t want to be unfair to my son. What are my options? Greg
Greg, I love that your daughter has been so diligently building a deposit – I don’t think any parent should rush to assist unless their child has “pain in the game” and knows how to scrimp and save themselves.
The bank of mum and dad is one of Australia’s most popular lenders.Credit: Simon Letch
This ensures they are financially and psychologically invested. And appropriately grateful.
Let’s start with acknowledging you could, of course, give her a portion of your cash. But there are two downsides.
If you are in receipt of some aged pension, giving any more than $10,000 in one year or $30,000 over five will affect it. More worryingly and relevantly, as you say, you may yourself run out.
So, let’s talk the safeguards to avoid a cash catastrophe – or cash-astrophe – for the generous bank of mum and dad: equity extraction.
There are three main ways to get at the value currently lying latent in your home.
Go guarantor for your daughter’s property
This has a triple benefit for her – it tops up her deposit and fast tracks her home purchase, it potentially overcomes borrowing power limitations (higher interest rates are lowering what an institution can lend) and if it brings her up to a 20 per cent deposit, it possibly even saves her from paying extortionate lenders’ mortgage insurance.
For you, you don’t need to stump up precious cash. However, there is a big risk – principally, that she becomes unable to meet repayments.
When you go guarantor, you put up a portion of your home as security for a loan, therefore – worst-case scenario – you could lose it.
You can mitigate the risk by signing over as little as possible and also plan to remove yourself from the loan as soon as the property’s value (hopefully) rises sufficiently to do it.
Your decision whether to guarantee your daughter’s loan will largely come down to your assessment of her viability. Is she a good bet? To remove the repossession risk altogether though, there’s another option to try.
Sell and downsize
Bearing in mind the pension gifting restrictions above, this could facilitate you giving your daughter and your son an equal share of some of your profits.
If you are too personally stretched, this also alleviates that running-out-of-cash risk. But there is a way to do this even if you are utterly unready for this big move.
Reverse mortgage
Provided you are over 60, you could take out a commercial reverse mortgage against your home. This lets you get out a percentage of its value in cash without making repayments – they “roll up” until the loan becomes due on your property’s sale (as late as when you die). Because it is “free” in the interim, interest rates are expensive.
There is also a cheaper but more limited alternative once you hit pension age: the Family Services Home Equity Access Scheme, from which you can also get a (lower) lump sum.
Now to your other point – the danger of a former partner making a claim on your hard-earned contribution.
Parental help into property is one of the main factors driving the rise in prenups or binding financial agreements in Australia. Made correctly, these up-front agreements should quarantine your money from anyone else getting their mitts on it.
Finally, regarding your son, I am sure he would appreciate an equal and instant contribution to his own mortgage and you downsizing is probably the best and cheapest way of achieving this.
But if that is not appealing, simply equalise it for your offspring in your will: giving your son that much more in assets.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter or Instagram.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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