Article by Tracy Parish (Mortgage Broker) of Mortgage Masters
Helping Adult Children In To The Property Market Without Risking Personal Wealth
With house prices soaring in Sydney and throughout Australia, it’s little wonder that first home buyer purchases are on the decline. This mini property boom, caused by low interest rates and stable employment levels, has simply priced first home owners out of the market. Family guarantees have essentially been around since the dawn of the modern economy, however, traditionally carrying a significant risk to the personal wealth of the parents.
Enter parent to child loans (P2C), a new product launched on the market by LaTrobe Financial aimed at assisting ‘generation rent.’ Parents are often willing to assist their children in entering the property market in a multitude of different ways:
- allowing adult children to live at home, rent free
- gifting a home deposit
- co-purchasing with the child which meant that they no longer qualified for the First Home Owner Grants (FHOG) or stamp duty concessions.
While helpful, gifts and traditional guarantor arrangements leave the parents open to financial loss in the event their child defaults on mortgage payments, or even experiences a divorce.
How It Works
- Parents decide the amount of the loan and the interest rate they wish lend to their child (minimum of CPI + 0.5%).
- Parents make a secured investment in LaTrobe Financials’ award winning Credit Fund. This credit fund is externally rated, with 15,000 existing investors. The parental investment may be for the full amount or a portion of the property purchase price.
- This contribution is secured by way of a registered mortgage. This allows access to the funds at all times if the child isn’t able to make payment or in the event of the child’s death or marital dissolution.
- As a P2C loan is a formalised investment, there is no risk of loss to the parent in a deceased or marriage dispute scenario.
- Child still qualifies for the FHOG (if applicable).
- Monthly income is paid to the parents.
- La Trobe Financial then loans money to the child
- Parent support can, at any time, be waived/forgiven or enforced. The funds for investment can originate from individuals, companies or family trusts, though it is always recommended to obtain legal advice before investing.
What are the benefits of Parent to Child (P2C) Loans?
The benefits of a P2C Loan include:
- Protection of both parties through LaTrobe Financial acting independently
- No need to resort to debt recovery
- Relationship documentation to protect the full economic value of the P2C assistance
- LaTrobe acts as the “policeman” while parents retain control of assistance sum
- There is a platform available for joint assistance (i.e. extended family/multiple investor options)
- Increased purchasing power in the property market for the child
- P2C loans have one off legal agreements, making them more cost effective
- No guarantee required by the parents, and no risk to personal assets
- Intergenerational wealth distribution is protected from the effects of marital separation
- Children are protected from impulsive eviction by parents
When parents require additional security, the loan may be registered against the title of the child’s property. It is always important to remember, however, that while parents, their children and in-laws may have a fantastic relationship today, nobody can predict the future. That’s why security in this area is of great importance.
Family finance scenarios are a high-risk area, with great reward when all works out for the best. P2C Loans have the potential to eliminate familiar loaning pitfalls but providing security for both parties. Documentation is key for clarity and peace of mind.
If you are interested to learn more about P2C Loans, or financial products on the market aimed at assisting children in to the property market. Elliot Watson Financial Planning would be happy to refer you to a mortgage specialist if you would like to discuss the content of this article further.
Elliot Watson is an award winning CERTIFIED FINANCIAL PLANNER™ and enjoys helping clients achieve their financial goals. He is committed to building strong relationships with clients built on a foundation of open and honest communication. If you would like help achieving your financial goals, contact Elliot on 02 4038 1623 for a complimentary initial consultation.
Any advice contained in this newsletter is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this edition is correct as of the date of publication and is subject to change.
RI Advice Group and it Authorised Representatives are not endorsing this product and as a licensee are not responsible in any shape or form and the interpretation of this information by the reader, who should use their own judgement when dealing in this space.