Joan is considering giving her son some assistance to help him buy a home, but she’s unsure whether she should simply let him save a bit harder.
My son has asked for a loan of $50,000 to help him buy his own home. I have the money but I’m not sure if I should lend it to him, or go as guarantor for a loan in his name. I currently receive a part Age Pension and would like to know if this will be affected.
A. Firstly, let’s deal with the Age Pension implications before the legal and moral issues.
If you lend your son the $50,000 in one go, Centrelink will consider this to be over the gifting limit of $10,000 per annum. The additional $40,000 will be considered as a deprived asset,but you will be assessed as though it’s still yours. You can gift $30,000 in any five-year period, so your deprived asset will reduce over time.
Your Age Pension will also be affected if you use your family home as security for your son’s loan, or if you act as guarantor on a loan. Even if the intention is that your son repays the mortgage, the loan will be an assessable asset until it is repaid or considered irrecoverable.
Should the worse happen and the loan can’t be repaid, the bank may sell your home to recover the debt. If this happens, Centrelink will treat the money from the sale of the house that is retained by the bank as a gift to your child and will be assessed as a deprived asset for five years.
You may also wish to consider these other factors before handing over your nest egg.
Can your son be trusted?
Of course, he can, you say, but if he’s struggling to save enough money for a home deposit, maybe you need to ask where the rest of his money is going.
Borrowed money can be a source of conflict
If you have decided that you can afford to have your money tied up for a period of time, but are expecting regular payments, you will need to decide if your son can make these repayments. If you’re relying on the repayments to fund your retirement or cover everyday costs, a missed payment may cause you stress and lead to arguments.
Have your loan agreement formalised
Yes, it’s an additional cost but it is important that you have a legal agreement drawn up. It should detail the amount borrowed, interest payable, repayment due dates, what happens if the loan is not repaid and what happens to the debt should either of you die.
Keep your family in the loop
While finances can be a personal issue, it’s important that if you have other children, you let them know what you and your son have agreed. You’re not asking for their approval or agreement, but it does concern them to an extent.
Whatever you decide to do, remember that the decision is yours to make.