Latest NewsEarly Inheritance: Buying the Kids a Home of Their OwnThursday, 01 December 2016

Worried their children may never be able to afford their own home, a growing number of parents are putting their hand in their pocket to give their kids an early inheritance by buying them their first home. 

This increasingly common trend is part of the legion of parents taking charge of their adult children's housing future, including acting as guarantors on mortgages, forking out for the downpayment and renting their investment property to their offspring at greatly reduced rates. 

"Properties are just too expensive for young people to afford, particularly in Sydney," says Jean Joss, a university professor. She and her husband have been renting their investment property in Sydney's eastern suburb of Woollahra to their son and his wife for the past three years. The young couple pays less than half the market rate for the three-bedroom home. 

The price difference is of no issue to Professor Joss and her husband. "We have to help our children," she says. "It might be different if we needed the money, but we're comfortable." 

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For Professor Joss and an increasing number of parents like her, helping their children gain a foothold in the property market is a form of early inheritance. "We're not going to live forever," she says. "They're going to get the house anyway, so why not let them have it when it's of use to them?" 

Lenders and financial advisers have noted the rise of this early inheritance phenomenon. 

"We definitely do see where the parents are in a position to help and they want to help, it is becoming more common for them to help with their children's first mortgage," says Heidi Armstrong, director at home-loan lender State Custodians Mortgage Company. "Since lending criteria tightened, gone are the days when getting a mortgage was easy. That's where family members, and parents in particular, are helping out." 

"It's become a lot more prominent because of the times we are in," adds Wilson Luna, author and founder of Your Family Your Money. 

Helping your child on their way to owning their own home, however, is an emotional decision and may not always be the wisest route to take. "I'm a strong believer that when investing, or helping your children, it should be done on a logical basis, not an emotional basis," says Luna. "As parents, one of the best lessons we can teach our children is to save and make their own investments." 

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From an investment perspective, parents would be better off directing their hard-earned cash into the stock market or superannuation. "There is a tax advantage in moving your money into superannuation that traditionally has a better tax structure than something like this would," Luna says. 

Apart from the high entry cost, property will incur capital gains tax and stamp duty among other outgoings, say financial experts. 

"If you keep the emotion out of it, parents do not benefit from buying a property for their children," financial adviser Paul Cooke of Centric Wealth says. "There is a capital gains tax advantage if the property is bought in the kids' name, but the negative side of that is that the parents lose a lot of control as the property is not in their name. And it doesn't produce them any income." 

Funding an adult child's home can also be fraught with complications in the event of a marriage breakdown. "Is your child with that partner for life? What happens when a marriage breaks down? The best way to protect yourself in this situation is to buy the asset under your own name," Luna says. 

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Deciding whether helping their children buy a home is a good personal investment comes down to individual circumstances. 

"It depends on what spread of assets parents have," Cooke says. 

"If they have a house and not much else, I would look mostly to the stock market or equities because of the income that can be produced. Net returns for residential properties are greatly reduced when you take out your land tax, agent fees and council rates," he says. 

"However, if the parents have a good spread of assets, real estate is a better option."
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