Financial planning is really about… parents helping children buy homes

Most young homeowners receive parental support when they buy a home.

Your older clients will be keen to talk about whether, and how, they should help their children buy homes. They will appreciate any ideas you can offer.

Possible ideas include:

  1. cash gifts, either a lump sum at the start to help with the deposit or regularly over the life of the loan;
  2. ‘soft’ loans to help with the deposit and to ease the non-deductible debt burden. These should be documented as loans and even secured with mortgages to give maximum asset protection if a family law or bankruptcy event occurs;
  3. limited guarantees for a small percentage of the loan, to take the place of a deposit and to allow the home to be bought say five years earlier than otherwise;
  4. deposits into interest offset accounts owned and controlled by the parent but linked to the child’s home loan, to reduce expensive non-deductible interest. This has the advantage of being naturally protected against a family law or bankruptcy event, and being easily reversible if circumstances change.

Bear in mind a cashed-up risk averse parent can find no better investment than lending money to their child to allow the child to pay off a home loan. The parent is giving up low and taxable interest income for higher non-deductible costs.

If the parent lends the child $100,000, would have otherwise earned 2% before tax, and the child pays 5% on the home loan then, assuming a 40% tax rate, the family is better off by $6,333 a year on an equivalent pre-tax basis.

This is calculated as follows:

[5%/(1-TR)] less 2% times $100,000 equals $6,333.

That is a significant saving to the family group.

Even better: the older clients will be happier because they have helped their children and grandchildren. That is why most people want to be wealthy in the first place.

The Dover Group