Many parents want to help their children buy a home, but providing financial assistance can come with significant risks. Before offering support, it’s essential to understand the financial and legal implications of different strategies, including gifts, loans, guarantees, and co-ownership.

Gift or Loan? Understanding the Difference

One of the first decisions parents face is whether to gift money or structure it as a loan. A loan may be interest-free and often includes a clause stating it is “repayable on demand” to protect the funds if the child experiences a relationship breakdown. However, there are key risks:

• Loan expiry: In many states, an unsecured personal loan becomes unenforceable after six years (three years in the Northern Territory) unless a demand for repayment is made.
• Missed investment opportunities: If the loan is interest-free, parents lose potential investment returns, which could affect their own financial security.
• Lender requirements: Even with a formal loan agreement, banks may require parents to declare the funds as a gift before approving a mortgage. If this happens, the asset protection intended by structuring it as a loan could be lost, potentially exposing the money to claims from a child’s spouse or partner in a future property settlement.

Gifting Money and Going Guarantor: The Risks

Gifting money or forgiving a loan can also create unintended consequences:

• Centrelink implications: If parents receive government income support, gifting rules may impact their eligibility. Interest-free loans are also assessed under the income test.
• Estate planning complications: If a loan isn’t repaid before a parent’s death, estate planning becomes more complex, particularly if there are multiple children who haven’t received the same financial assistance.
• Acting as a guarantor: If parents don’t have cash available, they may consider acting as a guarantor on their child’s mortgage. However, this can expose them to financial risk if the child defaults, potentially leading to significant liabilities, including the loss of their own home if it was used as security.

Co-Ownership: A Safer Alternative?

A potential alternative is co-ownership, where parents purchase a share of the property as a legal “tenant in common.” For example, if the child needs a 20% deposit, the parents could contribute this amount in exchange for a 20% ownership stake, while the child finances the remaining 80%. This structure provides several advantages:

• Asset protection: Unlike a gift or unsecured loan, co-ownership ensures parents retain a direct interest in the property, which can be passed on in their will.
• Control over property decisions: The property cannot be sold without the parents’ consent.
• Flexibility in estate planning: The parents’ share can be left to the co-owning child, other children, or even grandchildren, ensuring fairness in inheritance.
• Transparency: Property ownership details are publicly recorded, making it easier to track the value of the interest over time.

However, co-ownership also presents challenges:

• Centrelink implications: A parent’s share in the property counts as an asset for Centrelink assessment.
• Market risks: If parents need to sell due to financial hardship, the child may be forced to sell the home, potentially at an inopportune time.
• Tax considerations: Parents may be liable for land tax and capital gains tax if the property is sold at a profit.

To mitigate risks, all parties should sign a co-ownership agreement outlining how expenses, maintenance, and future sale scenarios will be handled.

Final Thoughts

While many parents want to help their children enter the property market, it’s crucial to carefully consider the risks and long-term consequences. Whether offering a gift, loan, acting as a guarantor, or choosing co-ownership, each option has legal, tax, and financial planning implications. Seeking professional financial and legal advice before making a decision can help ensure a strategy that protects both the parents’ and child’s financial future.