More parents are helping their children financially to get ahead.
So what are some of the considerations when gifting or lending money to ensure everyone’s interests are protected?
The ‘Bank of Mum and Dad’ now helps the majority of first home buyers get onto the property ladder.
It’s an act of generosity that can come at a price if it’s not done in the right way.
As a specialist law firm helping multiple generations of Austrlain families protect themselves, their families and their asset, Genders and Partners has taken warning of the potential risks of parents assisting their children with entering the housing market, particularly if the children separate from their spouse.
BOMAD loan arrangements and financial agreements are increasing as the Millennial cohort borrow funds from their parents amid rising property prices.
Buyers beware, especially the growing number of parents and grandparents of young Australians who are turning to the ‘bank of mum and dad’ for help stumping up home loan deposits.
Accounting for $29 billion annually, BOMAD is the nation’s ninth-largest mortgage lender and a port of call for almost 4000 Australian “kidults” every month.
While it’s natural for parents and grandparents to offer what they can, there is a real concern that adult children who borrow from parents are three-to-five times more likely to default on their mortgage within five years.
In the world of BOMAD (the Bank of Mum and Dad), there will often come a question that should fill parents (and grandparents) with dread: Will you go guarantor for my loan?
A guarantor home loan is when someone, usually a close relative like a parent, offers up part of their home equity as security to top up the buyer’s cash deposit.
It means the buyer only needs a small deposit or sometimes none at all, and avoids paying costly lender’s mortgage insurance (LMI).
As property prices enjoy a post-pandemic resurgence, an increasing number of first home buyers are being priced out of the market.
While a boon for homeowners, it’s a different story for those trying to get a foot onto the property ladder.
According to recent analysis, the Bank of Mum and Dad is now ranked as Australia’s ninth largest mortgage lender, lending adult children an average of $89,000 … lending that’s increased approximately 20% over the past 12-months.
It won’t have escaped your notice that there is increasing pressure in the first-home buyer space.
The youngsters cannot save enough – quickly enough – to keep ahead of the spiralling house prices.
They are under pressure.
And they sometimes pass that pressure onto their parents and grandparents, asking them to help them with the deposit.
A super fund is, at its most basic, simply a ‘trust’.
The ‘trustee’ of the super fund holds the ‘member’s balance’ on trust for the ‘member’.
What most people don’t realise is that because the super fund is a trust, it’s governed by the rules of equity that set out how trusts must be run.
Let’s say you have a SMSF (Self Managed Super Fund) and you receive a super pension during your lifetime, and on your death you want your pension to be paid to your surviving spouse.
If you are in a retail super fund, then your choices as to whom and how your super is paid after you die may be limited.
You will generally be able to specify ‘who’ gets your super, and in what ‘proportions’.
You generally will not be able to specify specific amounts, nor specify even basic “what if” scenarios, such as “If Jonny is under 25 he is to get 75% of my super, otherwise my super is to be split equally among my children”.
In addition to providing for retirement, funds properly accumulated in a regulated superannuation fund have risk management benefits if financial adversity occurs and the person needs the protection of bankruptcy.
A common stress for older people who need to become bankrupt is that they will not have time to recover from the financial adversity they have experienced.
The good news is that funds held in a regulated superannuation fund are protected and are not available to the bankruptcy estate.
Did you know that your superannuation savings could be subject to a hefty tax when you die?
Most people don’t know it, but there are death taxes by stealth in Australia.
While it’s not an inheritance tax per se, millions of Australians’ retirement savings may be taxable upon death.
It all depends on your marital status and whether you have “dependants” (that is children or someone else who lives with you and financially depends on you).