Authorities warn of dangers as parents become major lenders

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Parents have become Australia’s ninth-biggest mortgage lender.

The ‘Bank of Mum and Dad‘ has provided $34 billion in loans, bigger than HSBC, AMP and the Bank of Queensland.

Martin North, principal of Digital Financial Analytics (DFA), told RN breakfast that first-time home buyers were borrowing on average 20 per cent more than a year ago, helping to propel the spike in housing prices.

He says government policy, access to superannuation and the contributions of parents are big drivers of the boom.

“Parental contributions are averaging more than $89,000 – an increase of nearly 20 per cent in the past 12 months and enough for a 20 per cent deposit in most of the nation’s postcodes outside Melbourne and Sydney,” the AFR reports.

“They are also increasingly ‘gifting’ the use of equity in their own homes to cover deposits and expenses, which can typically add up to around 25 per cent of the purchase price, according to mortgage broker sources.”

Buyers’ agent Kate Bakos, says at auctions “there are parents nudging extra children to make a higher bid, or where parents are doing the bidding.

“Some parents are saying it’s their children’s inheritance in advance.”

Read more: Older Australians want their own place, not aged care

Mortgage broker Christopher Foster-Ramsay says parental involvement in their children’s loans is the highest he’s seen in 20 years.

Mark Chapman, director of tax communications at H&R Block, says cash gifts do not hold tax implications for either giver or receiver, but capital gains tax (CGT) may need to be considered for both shares and property.

“If your child pays interest on the loan, this needs to be recorded as income on your tax return, even though it’s a family member,” Mr Chapman says.

“Any interest paid by the parent will not be deductible because it is not incurred from any form of business activity.”

The AFR says parents are also helping their offspring by “providing rent-free or subsidised accommodation, helping with childcare and assisting with expenses or bills”.

Parents seeking to help are advised to document the process thoroughly.

According to the AFR: “Gifts, loans or joint relationships that are not properly documented or exclude other family members can create financial and legal problems that undermine relationships and often end up in court, lawyers warn.”

Read more: End of rental moratorium, stimulus payments hits the poor

The Department of Human Services defines gifting as giving away assets or transferring them for less than their market value. This can include:

  • transferring units in a trust or company and not receiving full market value for them
  • selling or transferring a property for less than market value
  • buying a car for someone as a present
  • not requiring repayment for a sum of money.

If you are receiving the Age Pension or other Centrelink benefits, you can gift $10,000 in cash and assets over one financial year or $30,000 in cash and assets over five financial years.

If you go over the allowable gifting limit, Centrelink will include the amount in your Age Pension assets test.

However, gifting can also improve your finances, if you remain within the gifting limit, as it can reduce your assets, allowing a slightly higher Age Pension payment. If the amount you give is under assets test and pension limits, it is possible that gifting $10,000 could increase your fortnightly payments.

You must tell Centrelink about any gifts, sales or transfers within 14 days.

Centrelink advice on gifts:

It’s a gift if both of these apply:

  • you sell or transfer an income or asset
  • you get less than its value or nothing in return.

It’s not a gift if both of these apply:

  • you sell or transfer an income or asset
  • you get money, goods or services to the same value.

Centrelink assesses your gifts to see both:

  • how they reduce your assets
  • if they go over the allowable amounts for gifting.

Any gifts you made in the past five years may count in your income and assets tests.

Are you a ‘member’ of the Bank of Mum and Dad? Are you helping your children in other ways?

Read more: Australia’s most affordable housing regions

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Written by Will Brodie


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