Home' API Magazine : May 2014 Contents Many people have some difficulty in finding a solicitor who
is willing to sign off such a certificate as many solicitors view
this once-off work as not commercially viable. That said, most
mortgage brokers will have solicitors that their clients have used
in the past.
¿ LEND THEM THE DEPOSIT
An alternative to using a family guarantee loan is to lend your
child money for a deposit. You may fund this using your own
cash savings or establish a new mortgage for the purposes
of on-lending it to your child. Some issues to consider with
> Do you charge the child interest in respect to the loan or
is it interest-free? If you do charge interest, the child’s
lender will probably want to see a loan agreement (even
if it’s only a simple one page agreement) setting out the
repayment commitment. This will obviously impact on
the child’s borrowing capacity (affordability) as it’s an
> In terms of repaying the loan, the child can get the bank to
revalue the property some time in the future (say in two or
more years’ time after buying it) and increase their mortgage
limit to repay you if the property value has increased
sufficiently (and they have enough borrowing capacity).
> This structure will allow you to use different lenders to your
child (as opposed to a family guarantee loan which is typically
with the same lender).
> You don’t need to provide a guarantee and as such no legal
advice is required by the lender.
¿ CO-OWN THE PROPERTY WITH THEM
Another strategy is co-ownership with your child. Typically, in
this situation, you would structure the ownership as tenants-
in-common (TIC). TIC ownership allows you to ascribe an
ownership percentage to each owner. Therefore, for example,
you might own 20 per cent of the property and your child owns
the remaining 80 per cent. The major benefit of this structure
is that it shares the burden (deposit and ongoing cash flow) of
property ownership. That is, perhaps your child can’t afford to
own the full property and having a share of a property meets
their situation better.
Compared to the other ownership structures, this one is quite
messy. Here are some issues to consider:
> All owners on the title of the property will need to be party
to the loan either as applicants or guarantors. If you’re joint
applicants with your child, this could have flow on effects
such as any offset (transaction) account will also be in
the applicants’ name (so your child may need to operate
a transaction account that is in joint names with you).
Statements will be sent to both account holders.
> All parties to the loan (regardless of if they’re applicants
or guarantors) will be jointly and severally liable for the
entire loan, not just each party’s respective portion. This
will negatively impact (reduce) both your and your child’s
borrowing capacity, as lenders will include 100 per cent
of the debt, but only your share of rental income (if it’s an
investment property) when calculating your future loan
> If you want to change the ownership in the future, i.e. remove
yourself from the title so that the property is solely in your
child’s name, it’s very likely that any change will trigger
capital gains tax and stamp duty liabilities. This can be
> One of the complicating issues with this structure is that
it’s often difficult or messy for the child to access the equity
in the property for future investment or property purchases.
For example, assume you help your child buy a property and
that property increases in value by $400,000 over the next
five years. The child may want to “access” that equity to
buy another property. In this situation you can either remove
yourself from the title (at significant cost) or co-borrow
again with your child. As you can see, both options aren’t
particularly appealing. In my experience co-ownership is
rarely the best solution for helping your child because of its
lack of flexibility.
At best, co-ownership is a shorter term solution (e.g. short-
term property ownership such as property development or buy,
renovate and sell strategies) but unlikely to be a good solution for
‘buy and hold’ property strategies.
¿ BE CAREFUL WITH GIFTS
Some parents, if they have the financial means, are keen to gift
a sizable deposit to their children to help them buy their first
home or investment property.
While this is a great way to help your children, you need to
think about protecting your family’s wealth.
For example, assume you gift $150,000 to your child to
buy a home. The child subsequently enters into a de facto
relationship and co-habits the property with their partner for
more than 12 months. If the de facto relationship subsequently
breaks down, it’s possible that your child’s ex-partner will have
a claim on the equity in the home you helped them buy.
It’s for this reason that I counsel clients to structure any gifts
as an interest-free loan instead of a non-repayable gift.
In addition, I often recommend that the parents take some
form of security in respect to their loan (eg. lodge a caveat over
To be enforceable at a later date it’s important that this loan is
In short, if you’re going to help your kids, get independent
legal and financial advice to ensure your family’s hard-earned
wealth is protected.
¿ TEACHING CHILDREN ABOUT MONEY
Taking a step back, perhaps the core of this article comes
back to teaching your children about money from an early age.
æBuying a first home that ‘needs work’ can be a good way to build
equity. Building equity will help you into your next property.Æ
API MAY 2014
MAY 2014 API
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