Property still hot

We have seen continued growth in property markets, with residential property still proving a highly popular asset class among Australians. However a 50 per cent rise in Sydney and Melbourne house prices since 2008 has made it increasingly more difficult for younger people to buy their first property.

The pace of house price growth is prompting more parents or other family members to put their assets on the line by guaranteeing home loans taken out by first home buyers. Recent statistics by NAB show the incidence of parents or family members stepping in to assist first home buyers has increased from 4.8 per cent in 2010, to 6.7 per cent in 2015.

The risks of going guarantor

As a financial adviser, I am concerned that although high net worth individuals may have the assets and capital available to assist first home buyers, many parents or family members may not have considered the consequences of going guarantor.

A guarantor is under a legal obligation to keep making repayments on a loan if the borrower is unable to continue to make the payments. This may become a reality if the borrower loses their job, divorces or separates or suffers a serious injury. If the parent(s) or family member are retired and living off their superannuation, they may not have sufficient income and may have to sell their own assets to meet the loan repayments.

Of course, the property may be able to be sold if needed, however you need to consider the possibility that the value of the property could have fallen below the loan value.

Hewison’s preferred approach

A better idea may be to gift the children a sum as an advance inheritance.

For those aged over 60, this could involve a tax-free withdrawal from their superannuation. This compares to a child inheriting super benefits at death, when they could be subject to tax of up to 16.5 per cent.

Bringing forward an inheritance may not only save the interest on the home loan or go towards the deposit, but may also save the child a significant amount of tax.

Importance of legal advice

I would advise anyone looking to go guarantor to a first home buyer, or making a gift to a family member, to seek legal advice from a solicitor. An appropriately structured loan agreement may provide asset protection for the individual in the case the individual defaults on the loan.

For more information on advance inheritances, please contact your financial adviser.

The information provided above is general information only and individuals should seek specialised advice from a qualified financial adviser. Please contact Hewison Private Wealth for more information.