Navigating the financial challenges of retirement can be a complex affair, and for many Australian seniors, the desire to help their children achieve the dream of homeownership is a natural instinct. However, before you open the vaults of the ‘Bank of Mum and Dad’ to provide an early inheritance or cash boost for your struggling offspring, it’s crucial to understand the potential repercussions on your pension and retirement savings.
The property market’s soaring prices, coupled with the rising cost of living, have left many young Australians unable to step onto the property ladder without assistance. It’s no wonder that the ‘Bank of Mum and Dad’ has become an increasingly popular source of funding. But as Hank Jongen points out, parents eager to help their children must proceed with caution to avoid jeopardising their own financial security and eligibility for government benefits such as the pension.
Before you commit to any financial assistance, whether it’s through a guarantor home loan, gifting money, or selling property at a discount, it’s essential to be aware of the rules and regulations that govern such transactions.
Guarantor home loans: A helping hand with strings attached
One way parents can assist is by acting as a guarantor on their child’s home loan, using their own property as security. This can be a powerful boost for your child’s borrowing capacity, but it comes with significant risks. If your child defaults on their loan, you, as the guarantor, are legally obligated to cover the repayments. Failure to do so could result in the lender seizing your home. Moreover, if you end up making repayments on behalf of your child, Services Australia may treat this as a gift, which could have implications for your pension.
The gifting dilemma: Generosity could cost your benefits
When it comes to gifting money, there are strict limits to consider. Services Australia allows you to gift up to $10,000 in one financial year and a total of $30,000 over five financial years without affecting your pension. However, exceeding these limits can reduce your government benefits. It’s also worth noting that selling property to your child at a below-market rate is seen as gifting the difference in value, which could similarly impact your pension.
Exploring government support and other alternatives
Before dipping into your savings, consider whether your children qualify for government assistance. The First Home Buyer Grants and The First Home Guarantee are two initiatives designed to ease the financial burden on first-time homebuyers. In some states and territories, First Home Buyer Grants offer up to $50,000, provided the funds are used to purchase or build a new home. Meanwhile, the First Home Guarantee (FHBG) allows eligible buyers to secure a home with as little as a 5 per cent deposit, without the need for Lenders Mortgage Insurance. Another way to help is by allowing your children to live at home rent-free, enabling them to save—though it may test your patience!
The importance of professional advice
Before making any decisions that could affect your financial future, it’s wise to seek professional advice. Services Australia’s Financial Information Service (FIS) offers free consultations to help you understand the potential implications of financial assistance on your benefits and retirement savings. Speaking with an FIS Officer can provide clarity and peace of mind as you navigate the complexities of supporting your children while safeguarding your own financial well-being.
To speak to a FIS Officer, call 132 300 and say ‘Financial Information’ when prompted. Remember, the decisions you make today can have long-lasting effects on your financial health, so take the time to consider all your options and seek expert guidance.
Have you ever considered giving your kids financial assistance for a home? What steps did you take to protect your retirement savings? Share your experiences and insights in the comments below—we’d love to hear from you!
Also read: ‘Bank of Mum and Dad’ increasingly used for mortgage repayments, living expenses
It’s nice to know that you can’t help your children without the government penalising you