Written by James Kelly, Partner, Wills and Probate Solicitor
With property prices reaching new heights across the country and lenders tightening the criteria for lending it is becoming increasingly common for home purchasers to turn to their parents for a significant contribution to assist them with their first home purchases. In some cases purchasers are required to have a 20% deposit to get a loan.
In lots of cases there is also an attraction for Pa and Ma as they can provide a concessional interest rate to their children which is likely to be greater than what they could achieve by leaving the money in the bank while helping their children.
There is evidence that at the moment, 60% to 70% of first home buyers are looking to their parents for financial help. The average contribution is assistance of an amount just under $90,000.00.
In addition to loans and cash gifts, some parents are willing to provide a guarantee using the equity in their own home to top up their child’s deposit. That guarantee can be released when there is sufficient equity in the property after the loan have been paid down. That period is about 3 years.
An advantage for the children is that the guarantee or loan may remove the need for mortgage insurance which can add $20,000 to a loan.
Evidence suggests that the Pa and Ma financial assistance makes them the 9th largest lender in Australia. This in turn create a big trap for parents, in that this assistance is often not legally documented.
At the very least, there should be a loan agreement, sometimes a caveat or mortgage to secure the loan. It is important for the parents to also review their Wills especially if there are other children who have not had the same benefits.
It is wise for the parents to put themselves in the same position as any other lender would by properly documenting the terms of the loan and what would occur if things do not go to plan.
For example, what would happen if the children/purchasers relationship ended or if one of them were to die before their parents? Consideration also needs to be given as to what would occur if the loan is required to be repaid to pay for a medical bill or to assist for the payment of the entry fee for aged care. There can also be implications if a parent is in receipt of a Centrelink benefit.
Our estate planning team can assist you to properly put in place the documentation that will protect you and outline what is to occur in the event of unforeseen events. Contact us today on 1800 770 780 or send us an email at email@example.com.