Getting a foothold into the property market has never been harder, so here are a couple of ideas that you may be able to use to give your child a leg up.
A family pledge
This option, offered by most banks, enables parents to help their children bridge the deposit gap by using the security in their own home to guarantee a specific amount of their child’s new home loan. The pledge helps the kids avoid mortgage insurance, but limits the amount of the guarantee and avoids parents having to put in cash. A family pledge cannot be used for vacant land, refinancing or home improvements, but for the standard purchase of a residential property, they are a good option, providing of course that you are comfortable your children can service the loan repayments. Your family pledge can be released when the balance is paid down or the value of the property increases sufficiently.
A Tenants in Common contract
For those of us who have adult children who struggle to save even a 10% deposit for their first home, they may also be denied a bank loan due to their relatively low incomes as young adults. The following is a real example whereby a client couple wanted to help their daughter purchase an inner city apartment for $600,000, which they originally had intended to do as “joint-tenants”, and treat their 50% as an investment.
Apart from the high Capital Gains Tax (CGT) issue, we were able to advise a slightly different structure as Tenants in Common, whereby they would own 10%, and their daughter would own 90%, as her residential home, and avoid CGT. In this situation, the bank took all three salaries into account, and the parents were able to provide the 20% collateral security from their existing residential home, and they helped their daughter avoid paying up to $10,000 for mortgage insurance. This is just a legal document, and no cash exchanges hands. Hence, if in the future, after the daughter has been married and started her family, and then sells her inner-city apartment to move to a suburban home, the following may apply.
Let’s assume the apartment is sold for $900,000 (10-15 years later) and a capital gain of $300,000 is realized. The daughter will not have any CGT liabilities, and in the parent’s case, they need to declare only 10% or $30,000 of the capital gain. So after normal 50% exemption, $15,000 or $7,500 is added to each parent’s taxable income. However, if they are now retirees and over age 67, potentially NO CGT will be payable.