THE times they are a changing! In the "good old days" couples got married, saved a house deposit, and then, when they became eligible for a loan, spoke to their friendly local bank manager.
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Today, the bank of Mum and Dad has become one of the top mortgage lenders in Australia.
It makes sense when you think about it.
Today, the average home costs around eight times average earnings (compared with 2.6 times in 1987). So there is no doubt that buying a home today is much more difficult for a young couple than it was 30 years ago.
- Noel Whittaker
Many parents are taking the view that it's best to help their children get a start early in life, and watch them enjoy it. It makes more sense than expecting the children to wait until their parents pass away in 30 years' time, just as the children are reaching retirement age.
There is another view, of course, and it's equally valid. This is that the kids should not be deprived of the opportunity to struggle and reach goals in their own right as their parents probably did.
I can see the logic in that, but if you are 60 now, and your children are 30, you probably bought your house around 1987, when the average home in Brisbane cost $62,000 - 2.6 times the average wage of $23,600.
Today, the average home costs around eight times average earnings. So there is no doubt that buying a home today is much more difficult for a young couple than it was 30 years ago.
I have long been of the "help sooner rather than later" view on one proviso - it must be a hand up not a hand out. The children must be responsible financial managers before any funds are handed over, which means making sure they are not tied down by credit card debt or personal loans.
But this begs the question - if you hand over a lump sum, is it going to be a gift or a loan? Once again, it depends on the circumstances. Apart from wanting to help their children, a thought that often occupies the parents' minds is what will happen if the children have a relationship breakdown.
If the money is handed over as a gift, might your child's partner walk out the door with half of the money you've given them?
My wife and I have long believed that "a gift given is a gift given" and money given to children should be on a non-recourse basis.
As far as we are concerned, the grief that would be caused all round by a divorce would be so horrendous that fighting about ways to claw back financial assistance that may have been given years ago is a bridge too far.
There is no "one size fits all" strategy here, but if you do intend to make a loan, it should be documented.
A simple agreement which includes clauses such as that the loan is repayable on demand and specifically in the event the recipients separate; and that the loan is interest-free, or interest-bearing at a certain rate, is the minimum that should be specified.
Options that should also be considered are securing the loan, i.e. registering a mortgage, and/or making it a condition of the loan that the recipients enter into a binding financial agreement that will bind a Family Court if things get nasty down the track.
While divorce is the common risk to consider, it may also be worthwhile having the document if any of the recipients of your generosity are in the type of employment where their assets could be up for grabs if they were to be sued. Depending on the size of the loan, you may be well advised to take legal advice.
Be especially careful if you intend to apply for the age pension when you reach pensionable age. Assets given away five years or more before application for the pension cease to exist for Centrelink purposes. By making a gift instead of a loan, you may substantially boost the age pension you would be eligible for.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance.
- This advice is general in nature and readers should seek their own professional advice before making any financial decisions.
