How to help your kids out with a home deposit
Thinking of helping one of your kids out with a home deposit?
If so, you’re not alone. Ever since the banks started requiring minimum deposits of 20% (without needing to take out Lenders’ Mortgage Insurance) and more carefully scrutinising home loan applications, the “bank of Mum and Dad” has become crucial in helping young people take the first step towards home ownership.
But don’t just give them the money! There are real risks in doing so, such as:
• The “King Lear” trap – remember him? He gave his kingdom away to his daughters in return for their promises of love and when they got what they wanted they dumped him (more or less). Don’t let that happen to you!
• Relationship breakdown – what if you give your money to your child and they go through a relationship breakdown? When the dust settles, will half the money (or more) go to their ex?
• Creditors and predators – these days young people are increasingly striking out on their own, whether as a side gig or as their main occupation. But if bankruptcy befalls your child – or they fall victim to a frivolous (but successful) lawsuit – your gift to them may be exposed.
Instead you should lend the money to your child – with a proper written loan agreement, secured by a registered mortgage over the home. Just like a bank.
Even if you can’t get a first mortgage (because the bank will want that), you can usually get a second registered mortgage (meaning that once the bank is paid out, you’re next in line).
Whilst your child might prefer a straight out gift, you’re still helping them out in a big way, and importantly it means three things:
1. R-E-S-P-E-C-T! Just like a bank, you’re their lender, and you can call in the loan if they default. So maybe they’ll treat you a bit nicer in your old age, especially if there is a chance that you might see your way to forgive the debt in your Will...
2. If your child suffers a personal financial crisis such as a business failure, lawsuit or relationship breakdown, the amount of the loan (possibly with interest) can be clawed back by you.
3. Depending on the terms of the loan, one day you may be able to call in the loan if you need the money for yourself – perhaps to fund aged care.
What if your child has a partner? In this case what you do will depend on in whose name the home will be purchased.
If the home will be purchased in the name of your child alone, then the loan agreement and mortgage will bind your child alone. In this case, your child’s partner has no say in the matter.
But what if the home is to be purchased in both the names of your child and their partner? In that case, the loan and mortgage will need to bind both your child and their partner to enable the mortgage to be registered over the home.
If the child’s partner objects, tell them that you’re only protecting your own interests - just like the bank is doing. It’s just business, nothing personal. And one day you will need the money to be repaid in order to fund your own retirement and aged care needs.
Be firm when you tell your child and their partner this. Maybe their relationship will stand the test of time, and maybe one day you will come to love your child’s partner as if they were one of your own. But until then, you need to protect yourself – and in so doing you are also protecting your child, because one day you may well decide to forgive the loan or you may actually give the benefit of the loan to your child in your Will as part of their inheritance.
For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email email@example.com to see how we can assist.