Using borrowings that are secured by assets

Helping children buy a home while protecting parent’s interests

 

Gift-from-Mum-and-DadAs reported in the media at the end of January, Cate Blanchett and her husband recently bought a waterfront investment property for nearly $2 million, apparently as an investment for their three sons.

 

 

This is indicative of the trend of parents wanting to help their children get a start in life, particularly since the Australian property market is so hard to break into. The desire to help is further intensified if there are grandchildren on the way. A 2012 survey of Australians aged 50 and over revealed that parents give $22 billion a year to their adult children to help them get established, buy property and tide them over during tough times.” This is all well and good, but what are some of the issues that these benevolent parents should consider?

Gift, loan or other?

One way to help adult children buy a home is providing them with money to help with a deposit. The gift may be given directly or contributed to a First Home Saver Account, a tax-effective way to save for a home. The problem with gifting is that the money is not protected in the event your child is married or in a relationship, and your child and partner then separate or divorce. In the event of a relationship breakdown, the gift becomes part of the joint assets of the relationship. Another issue with gifting is where parents intend to receive the age pension within the next five years. Any asset or amount over or above $10,000 gifted by a single person or couple in a single financial year or above $30,000 over a five year rolling period impacts on parents’ pension entitlements for five years.

A better way to provide support and to protect parents’ interests is through a written loan agreement. Even though children may view this as an expression of distrust, a written agreement would give all parties certainty about what has been agreed and what is expected of everyone. It would show the family that they are serious about repaying the loan. A loan agreement would ensure that the parents’ rights are protected in the event a child’s relationship with his or her spouse or partner broke down. It would also be helpful in preventing sibling jealousy with respect to parents’ assets and future inheritances.

Another option is for parents to provide guarantor support for their children by providing either the parents’ home or term deposits as security. Financial institutions offer a variety of options. The Commonwealth Bank has a facility called Guarantor Support, which would enable a child – through parental support – to borrow more funds than they could otherwise or purchase the property that they want rather than having to settle for a cheaper alternative.

Finally, parents could consider buying the property jointly with their children, but this would mean the parents would have their names on the title deeds. For both guarantor support and joint ownership of property, parents need to be aware that they are fully liable for their child’s loan obligations.

As further protection, parents who gift or lend money can insist that their child and spouse or partner enter into a binding financial agreement to ensure that the gift or loan is repaid if the relationship fails. These agreements can be made either before or during a marriage or de facto relationship.

Parents should always obtain specialist legal and taxation advice when setting up a loan for their children.

That said, here are some options to consider:

•    Should the loan be on interest free or commercial terms? Generally speaking, the more commercial the terms of the loan, the more likely the courts will be to view the loan as neither an asset of a relationship between a child and spouse/partner nor a financial resource of the child. The child should make repayments of the loan principal or pay interest at least annually.

•     If interest is charged, will it be fixed or variable or pegged to a bank interest rate?

•     Should the loan be open ended or does it need to be repaid within a certain time frame?

•     Should parents request security over the debt, even through the agreement is classed as a personal debt?

On the last point, one practical form of security is a caveat over the property. A caveat simply provides notice that a person claims a particular unregistered interest in the property, but it is not as powerful as a mortgage, which creates official rights over the property. In a bankruptcy context, failing to take security over the child’s assets may mean that other creditors get paid before the parent.

The importance of life insurance

Regardless of the way parents decide to financially help their children purchase a home, life insurance on the lives of children and even their partners should be considered. If illness, injury, or even death were to happen to an adult child who had just purchased home, it would be quite likely that the child – even one with a spouse or partner – would have trouble meeting mortgage repayments and could possibly even lose the home. The consequences would be compounded by the fact that the parents have provided funding, one way or another, with a potential impact on their retirement plans.

However, given that the child has just spent all his or her savings on the home purchase and associated costs, life insurance affordability would be an issue. Given this minimal cash flow, parents can also assist in this area, particularly as this would protect both themselves and their children. With lump sum covers (term life, TPD and trauma cover), the easiest way to do this is to set up a non-super (ordinary) life policy owned by the parents on the life of the child. This ownership structure would satisfy CGT exemptions under section 118-300 ITAA97 for term life (as the parents would be the original beneficial owners of the policy) and section 118-37 ITAA97 for TPD and trauma. These exemptions would also apply for cover over the life of the child’s spouse or de facto partner, so all lump-sum insurance proceeds would be tax free to the parents.

The good news is that given the age of the children, insurance premiums should be relatively low. The level of cover should at least be the amount of the loan or gift, so that the parents would not have a shortfall if an insurable event occurs. Income protection for the child should also be considered. This must be owned by the child to ensure that a tax deduction can be claimed, but of course the parents could also help out financially. Once the loan is repaid, the parents have the option of transferring the insurance cover to their adult children, so they could assume premium payments.

Summary

Most parents naturally want to help their children get started in life, and often provide a gift or a loan to help with a home deposit. The benefit of a properly documented loan is that it protects family finances in the event of an adult child’s relationship breakdown.

Life insurance on the adult children should be considered in order to protect the asset and parental financial support. The initial premiums can be paid by the parents and are relatively affordable given the age of the lives insured.

Source:  CommInsure

 

To pay or not to pay, that is the mortgage question

 

mortgage-credit-loan-signHome ownership is the Australian dream, but we also have a lot of other big dreams… overseas holidays, buying a boat or sending the kids to a great private school. So how do you decide whether you should pay off your mortgage faster or invest it for your big dreams?

The debate on paying off your mortgage versus investing can seem never-ending and everyone has an opinion. When it comes down to it, the right course of action depends on your personal situation, risk profile and financial goals.

One way to evaluate the situation is to think mathematically– you can compare the tax implications, interest savings, rates of return and past market movements.

This sort of evaluation can be complicated, so it might be best to get your financial adviser involved to help with the quantitative analysis. Before you do that, you can ask yourself a few questions to start the decision making process.

How many years do you have left on your mortgage?

If you have less than 10 years left on your mortgage, you might want to consider paying it off, as 10 years may represent a short period to invest in the stock market or investment bonds.

How good are you at sticking to a plan?

Paying off your mortgage early may present you with a surplus of cash or disposable income. If you are not disciplined and stick to your investment plan, you may find yourself tempted to spend your surplus funds. This can set you up in a fantastic lifestyle, but it may not be sustainable through your retirement if you don’t save enough.

Is your lifestyle stable?

You know your personal situation best and you can decide how stable the future is likely to be or if there is a high probability that something will come along and derail your financial plans. If you feel secure in your job and that you won’t need to access a lot of cash quickly, then aggressively reducing the mortgage might be the best path for you.

If you are the sole bread winner or job security is an issue, you might look at investing so that you can access your money in case of emergency or leaving the surplus within a redraw facility.

If your mortgage does not have a redraw facility and you pay it off aggressively, you could run the risk of needing to borrow money later at a higher interest rate.

What are your investment goals?

If you need to invest for an important goal, you need to look at how much money you will need for that goal and how far off it is. If your goals are a long way off, you can have the satisfaction of both investing and making additional payments on your mortgage. It is as simple as allocating part of your available surplus funds for one goal and then using the remainder towards reducing your mortgage.

 

So, what should you do?

You need to look at both the mathematical and emotional parts of your financial strategy. Your financial adviser will help you weigh the pros and cons of different investments and can provide a financial analysis for each option.

Case study

Judith has a home loan of $250,000 with 20 years left to pay.

She is paying $1,908.35 per month of principal and interest and has an extra $100 a month to play with. She is considering the following options:

Option

Implication after 20 years

Use the $100 to pay off her mortgage, after she has paid off the mortgage after the 18th year, she will have $2,008.35 a month in cash which she will invest

Judith will have $51,780 in her investment

Invest the $100 into an investment bond

Judith will have $43,888 in her investment

Invest the $100 as a contribution to super after tax

Judith will have an additional $46,655 in her super

Salary sacrifice the amount as $194.17 before tax

Judith will have an additional $77,001 in her super

Things Judith will need to consider:

  • The best option is for Judith to put her extra money into super via pre-tax salary sacrifice payments, however these contributions are preserved (locked away) until retirement and Judith may need to access this money before she retires.
  • If she pays off her mortgage, she will then need to look at her ability to redraw the money if she needs to access funds in the case of an emergency.
  • If she invests into the share market, she will have to pay tax on the investment earnings and capital gains upon sale of the investments.
  • If she pays the $100 into an investment bond, the investment earnings (including capital gains) will be taxed at a maximum rate of 30%. Withdrawing from the bond after 10 years from the initial investment means there will be no taxation implications.
  • The calculations in this case study are based on the following; the mortgage has 6.8% interest rate, her super fund, investment bond and investment portfolio returned 6.5% (inclusive of 3% pa growth, net of fees and excluding franking credits). Tax on earnings has been factored into all options (including the super fund and investment bond) whilst she paying 45% tax (not including the Flood Levy) on the investment portfolio. But these could change in the future.

Contact your adviser today to discuss the best options for you.

Source | IOOF

money gift

Helping the kids buy a home

Helping the kids buy a home and protecting parents’ interests

money gift

Thanks Mum & Dad XOX

A recent survey of Australians aged 50 and over has revealed that parents give $22 billion a year to their adult children to help them get established, buy property and tide them over tough times.

Gift, loan or other?

One way to help adult children buy a home is providing them with money to help with a deposit. The gift may be given directly or contributed to a First Home Saver Account, a tax-effective way to save for a home. Any asset or amount over or above $10,000 gifted by a single person or couple in a single financial year or above $30,000 over a five-year rolling period impacts on parents’ pension entitlements for five years.

A better way to provide support and to protect parents’interests is through a written loan agreement. This would ensure that the parents’ rights are protected in the event a child’s relationship with his or her spouse or partner broke down.

Another option is for parents to provide guarantor support for their children by providing either the parents’ home or term deposits as security. Finally, parents could consider buying the property jointly with their children, but this would mean the parents would have their names on the title deeds.

For both guarantor support and joint ownership of property, parents need to be aware that they are fully liable for their child’s loan obligations. The possible effect on parents’ pension entitlements should also be a consideration in both arrangements.

 

As further protection, parents who gift or lend money can insist that their child and spouse or partner enter into a binding financial agreement to ensure that the gift or loan is repaid if the relationship fails. Parents should always obtain specialist legal and taxation advice when setting up a loan for their children.

 

Here are some options to consider:

 

• Should the loan be on interest free or commercial terms?

• If interest is charged, will it be fixed or variable or pegged to a bank interest rate?

• Should the loan be open ended or does it need to be repaid within a certain time frame?

• Should parents request security over the debt, even through the agreement is classed as a personal debt?

Adelaide Financial Advice - Seven Deadly Sins

Seven Deadly Financial Sins for Women (and some men!)

Seven Deadly SinsSeven Deadly Financial Sins for Women (and some men!)

Unless we’re rubbing shoulders with A-listers or running a multi-million dollar fashion business, we need to invest time and effort if we want a successful financial future.

It seems that today’s woman can be easily distracted by the comforts that short term material wealth can provide and these ineffective money management habits are best described as Seven Deadly Financial Sins.

 

Sin: Sloth

People who stick their head in the sand and are happy to take the lazy approach when it comes to their financial situation may suffer from the financial deadly sin – Sloth.

Rescue yourself by…
Taking charge of your financial affairs, starting with your superannuation and find lost super by logging onto the ATO’s Super Seeker website at http://www.ato.gov.au/super.

Sin: Anger

Finding excuses or others to blame for your financial situation doesn’t make it go away.

Rescue yourself by …
Take a reality check by doing a budget based on your income and expenses. You may be surprised. Visit the budget planner tool on the ATO website. If it helps curb your needless spending ways, then you shouldn’t be angry any longer.

Sin: Greed

People of today live in a ‘now’ society and the risk of this behaviour is that it may trap you into spending more than you earn.

Rescue yourself by…
Building your wealth through sound financial strategies that suit your financial and lifestyle needs. This can give you peace of mind to have all that you want – with a little discipline.

 

Sin: Damsel in distress

Ladies (or fellas) in-waiting on the lookout for a knight in shining armour to rescue them from the burdens of their financial situation is otherwise known as Cinderella syndrome.

Rescue yourself by…
Saving regularly – just $20 per week can add up to over $7000 in five years in an online high interest bearing account.

Sin: Gluttony

Ladies with an appetite for debt and credit cards to feed their addiction may suffer from the financial deadly sin of Gluttony. Online shopping and VIP nights at your favourite department stores feed on gluttonous appetites and before you know it, you’re in way over your head.

Rescue yourself by …
Spring cleaning your debt – start with cutting up store cards and start to seriously consider protecting your wealth.
Income protection insurance will provide you an income when you’re sick or injured and unable to return to work.

Sin: Lust

It can be hard to resist a good deal and retailers enhance their businesses to appear irresistible with ambient music and designer scents – all to put shoppers in the mood for spending money.

Rescue yourself by…
Take control of your financial future and put a portion of your regular income into savings and investments so it’s not all lost through the temptation of impulse shopping.

Sin: Envy

Don’t hold a vendetta, do something about your financial situation if you’re not happy with it.

Rescue yourself by …
Consider an investment plan that works for your short, medium and long term goals.

Be your own fairy Godmother

It’s never too late to rescue yourself and take control of your financial destiny. Your financial planner (hint! hint! ) can provide straightforward and transparent financial advice by helping you with your current situation and implementing a plan to meet your needs in every stage of your life. 

Source | MLC