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Supporting Your Child's Journey to Their First Home Purchase

Todd Conklin • January 30, 2024

In the current economic environment, many parents find themselves in a position where they can offer their children a helping hand with purchasing their first home. At the same time, house prices have increased to ridiculous levels. These two factors combined have resulted in the “Bank of Mum and Dad” becoming extremely popular! Helping out the kids can make a significant difference in their journey towards homeownership. In this article, we'll explore three possible strategies you might consider to support your child in this important milestone.


A couple considerations:

  1. Before jumping in to help out, consider whether you’re inadvertently encouraging a large financial commitment they just aren’t ready for. Will your gift be a blessing or a curse in years to come? Being responsible for a mortgage, learning to budget and understanding commitment (or the perils of over-commitment!) are crucial elements of adulting that come with home ownership. You may unwittingly deprive them of learning these lessons by being to generous.
  2. What about the other kids? If you have more than one child, the family dynamics could make this very complicated. Are you able to offer the same assistance to all kids? Would that assistance look different for different kids? Is it still equitable? Are you going to cause contention down the track – perhaps even after you’re gone.


However, if the Bank of Mum and Dad is still willing to do business, here’s a few options.


Gifting them money

Pulling out money from super or other savings to donate as a cash gift can be a great way to contribute to your child's home deposit. However, it's important to bear in mind a few key points. Banks often require such gifts to be in your child’s account for a certain period, typically three to six months, so planning is essential.

Lenders will want to ensure your child is financially stable enough to manage the mortgage payments. This typically means they need a stable job or a reliable income if they're self-employed.

Remember, when you hand over the money, it’s not coming back. You might need to formally acknowledge that you don't expect repayment.

Another consideration is the impact on Centrelink. Gifts over $10,000 will still be counted as your asset for five years, so if you’re thinking that increasing your Centrelink entitlements may be a handy bonus for helping out the kids, you may have to wait a while to see the benefits.

Consider the implications if your child is purchasing a home with a partner. In the event of a relationship breakdown, the partner might retain a portion of the property your funds helped to secure.


Loaning them money

This option is quite similar, but it's important to establish a formal legal agreement between you and your child. This agreement should outline all the mutually agreed-upon terms of the loan, including:

• Repayment Amount: You have the flexibility to decide whether you want to receive repayments, and if not, this should still be documented in the agreement.

• Interest Rate: You have the option to charge interest if you wish, but it's not mandatory.

• Repayment Schedule: You can specify when the loan should be repaid in full or in installments. This private agreement allows you to set the rules, with the added advantage of being able to recall the money if needed, which can be a safeguard in case your child's marriage ends in divorce.

• Forgiveness on Death: Another available option for parents is to forgive the loan upon their death.

The primary drawback of this approach is the requirement for a formal legal agreement, which may incur some costs. However, not having such an agreement could potentially lead to unfavorable outcomes when trying to assist your children.


Joint Purchase

Some parents are happy purchasing a home with their children as co-owners, either in their own names or through a family trust arrangement. The concept behind this is that the child will gradually acquire full ownership of the property, either over time or through a single lump-sum payment, eventually assuming complete ownership of the property. You might share ownership in different proportions or include clauses regarding the future passage of your share.

This option calls for detailed legal guidance to ensure both your and your child’s interests are safeguarded. It's a good idea to set clear, mutually agreed-upon guidelines before proceeding. Further, Centrelink might consider that property as one of your assets, since your name will be on the title, which could be detrimental to your entitlements.

A few things to be aware of are:

• Your child won’t qualify for the First Home Owners Grant

• When the time comes to transfer your share to the child, there will likely be some Capital Gains tax issues. Who is going to fund that?


“Going guarantor”

Offering your property as equity through a guarantor loan is an alternative to providing cash. This option eliminates the need for your child to accumulate a deposit, as your home's equity secures the loan.

You might choose to limit your liability to a percentage of your child's property value. This can help in ensuring your release from the guarantee once certain conditions are met, like an increase in property value or partial loan repayment.

Keep in mind, if you're retired or still paying off your mortgage, this option might not be feasible. Additionally, your child needs to demonstrate their ability to maintain their mortgage payments.


The bottom line

Assisting your child in buying their first home is an incredibly supportive act, one that could set them on a path to a more stable and secure future. And if you have the means to do so, it might be a wonderful way for you to enjoy the impact in their lives instead of making them wait for the inheritance – at which time they may not need assistance any more, and you won’t be around to see the benefit. Thoughtfully consider which method aligns best with your family's needs and circumstances, and you'll be giving your child an invaluable head start in their adult life. However, no method is without its drawbacks and these need to be considered carefully. Seeking proper advice is crucial, as these decisions can have huge consequences, good and bad.


Valo Wealth is committed to guiding you on your journey through an ever-changing landscape. With our unique approach to financial services, we aim to give you the clarity you need to make good financial decisions.

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Insurance and Swimming Between the Flags

By Todd Conklin • September 17, 2024
Valo Wealth exists to help you connect your wealth to what’s most important. We strive to be your guide through an uncertain journey. Perhaps another analogy would be lifeguards… I’ve never been a lifeguard, but I am a keen surfer and am very familiar with the wonder and beauty of the ocean but also the dangers that lurk there for the inexperienced. Lifeguards know where to put the flags to maximise your safety. Swimming between the flags doesn’t guarantee a risk-free experience, but it does manage risk and provide a layer of protection, with watchful eyes ready to help if you get into trouble. When you go to the beach, swimming between the flags assures you that a trained lifeguard who is both willing and able to help will come to your rescue if you get in trouble. Outside the flags or on an unpatrolled beach, you have no such protection. In a financial sense, swimming between the flags involves many factors, but one important element is insurance. Insurance fulfils the same function. Without it, you have no protection if things go wrong. With it, you have the peace of mind of knowing there is a financial back-up. Whilst we may not put our insurance companies on the same pedestal as our lifeguards, at the end of the day, they will come to our rescue if required. Of course, you don’t go to the beach expecting to drown – you expect to have a lovely time. So, too, with insurance, the expectation is that you won’t have to claim – and what a great outcome. But if you do, you must be adequately protected. Let me share a personal story that is, unfortunately, unfolding in my family as we speak. My wife and I are generally quite diligent in keeping up all forms of insurance. Many years ago, we took out top-shelf comprehensive car insurance on our vehicle – you know, the kind with the free windscreen repair, hire care included, agreed value, choice of repairer etc. I was satisfied we had the best we could get. That was about eight years ago, and then life got busy. We never really reviewed it, and we felt that everything was OK. Fast forward to today. Our daughter, who was 10 years old when we took out the policy, is now driving and just got her P’s. I dutifully ‘dusted off’ the policy and took a cursory look, noting we had an “inexperienced driver excess”, and was satisfied my house was in order. A week later (a month ago now), my daughter had an accident. It was only minor, and she was fine – she reversed into a parked car in a split-second poor decision. No big deal, but she managed to scrape down one side and rip off the rear bumper bar of the other vehicle, courtesy of the bull bar fitted to our Toyota Prado. So not a cheap repair, impacting at least three or four panels. “No problem”, I thought to myself; I’ll call the insurer and make a claim. Guess what I was told when I called up? “I’m sorry, you are not covered. Your daughter is under age 25, and when you took out the policy 8 years ago, you opted to exclude drivers under age 25”. The result, is we have no cover in this instance, and the “Bank of Dad” gets to pay in full for the repairs to this guy’s car. We haven’t received the bill yet, but I estimate somewhere between $5,000 and $15,000. It hurts, but it’s manageable. However, you know what hurts most? It was completely avoidable. Had I checked the fine print, my exposure would have been limited to the extra $750 excess! So here I was, thinking I was safely swimming between the flags when I was completely exposed. I count myself lucky. Firstly, the only injury my daughter suffered was to her pride. But secondly, imagine it was a more serious accident. Putting aside personal safety, the cost of paying cash to replace both our vehicle and the others could quite possibly be over $100,000 – maybe even $200,000 if she hit the right (or wrong!) type of car. I’m somewhat embarrassed by this experience and am certainly guilty of being the ‘plumber with the leaky taps’. But I felt it was important to share, in the hope it has been a timely reminder for you to review your insurance. As a financial adviser, our domain is life insurance – the stuff that protects you, which arguably is the most critical coverage. Compared to cars, people, along with their future earning capacity, are very expensive to replace. Over the coming months, we’ll be diving deeper into the topic of life insurance. For those that are a little older, don’t switch off! Whilst you may be past the age of requiring life insurance, your kids probably are not, and there are compelling arguments for you to take an interest, but more on that in the next article!

What happened last Quarter?

By Todd Conklin • July 11, 2024
Perhaps the best question might be, what do I do? At least for my clients, what you shouldn’t do is fret about your portfolio, because it’s not what matters.

Some changes to super coming – and they’re good ones!

By Todd Conklin • April 1, 2024
It's fair to say that the rules around Superannuation seem to continually change. It's a challenge for me to keep up, yet alone someone who doesn't do this stuff for a living. However, it's not all bad. In fact, there have been many changes that have been quite positive, and make superannuation easier to build or access. One such change is happening in the new financial year. For the first time in three years, people will be able to put more money into their super, thanks to some positive stats from the Australian Bureau of Statistics on wage growth. So, starting July 1, you can contribute a bit more to your super than you can right now. The limit for concessional (before-tax) contributions is rising from $27,500 to $30,000, and for non-concessional (after-tax) contributions, it's rising from $110,000 to $120,000. I probably get more excited about this stuff than you do, but I think it's great news, especially for those with some spare cash they can sacrifice to lower their tax, and the older folks among us who can build their super just a little more before retirement As a reminder, Concessional contributions, like the super your employer pays or the money you put in before tax, get taxed at only 15%, which is usually way less than your regular tax rate. And non-concessional contributions don't get taxed at all. These can be made from the money you have built up in the bank account. Once the money is in super, regardless of which contribution type, will only be taxed at 15% on any money that is earned, which is often much lower than if you made that same return outside of super. If you're still with me, there’s also the “bring forward” rule that lets you put in up to three years’ worth of non-concessional contributions in one go (which means from 1 July, you can contribute $360,000 instead of $330,000). Likewise, for concessional contributions, there are "catch-up" contributions that can be made for people with super balances under $500,000, which allows them to contribute their unused pre-tax caps from the last 5 years. Note that the Concessional contribution cap includes the compulsory super your employer contributes. As of 1 July, this is also increasing to 11.5%, which is generally good news. If you're thinking of adding extra money to your super, please check with me first! Several rules might impact how, when, and how much you can contribute to your super, such as age, super balance, history, etc. The rules are still complex! But the take-home is that these changes are good, not bad.

Investor Returns vs Investment Returns

By Todd Conklin • January 4, 2024
To kick off the New Year, I thought it would be an opportune time to talk about investor behaviour and how it impacts investment decisions, especially those people who don’t have an adviser (which, of course, is none of you!). Did you know there is a big difference between Investor returns and Investment returns? And unfortunately, the first one is seldom bigger than the second one. Let me explain. Over the last ten years, ending 31 st August 2023, $100,000 invested in the Australian Share Market would have made $121,651*. That’s a cumulative return of 122%! Now, as you may know, when markets move, they tend to move quickly. Timing the market is virtually impossible (that’s a whole other subject). Let’s say someone was trying to time the market. They noticed on a given day that shares had jumped significantly. They were swift off the mark and invested the very next day. Let’s say they were equally quick each time the market had a significant jump, and as a result, they only missed ten of the best days in that whole ten-year period. The result? They would have only made $42,093. Not being invested for those ten days cost them three times that amount! That’s a huge difference. It gets worse. What if, as is quite possible, they missed the best forty days? They would have actually lost $29,597! In other words, their return would have been $151,248 less than what it would have been if they had just remained in the market. Scary right? I don’t think so – it’s only scary if you’re one of ‘those’’ people. But you’re not. It’s actually very comforting. Because if you keep doing what you are already doing – what I have been telling you to do, and stay in the market, invested sensibly, you can get great returns. Regardless of what happens this year in the markets, please be confident. There will be ups and downs, but over time, the ups will defeat the downs, and the good times will outnumber the bad. *Source: Morningstar. Returns based on the S&P/ASX 300 Index, for a 10-year period ending 31 August 2023.

Craving Certainty

By Todd Conklin • November 8, 2023
Nestled in the opening paragraph of our annual agreements is the following sentence: “ As humans, we crave certainty, but we can’t have it. Our value to you lies not in a static plan or projections but in being your co-pilot in your journey, knowing how and when to make course corrections to get you to your destination ” I want to tell you where that statement came from. I’ve had countless conversations with people, who, despite ticking all the boxes for a secure future, still feel a nagging worry that it might not be enough. If this rings a bell, take heart—you're definitely not the only one. In my chats with clients over the years, 'anxious' is the word that pops up most. If you're in the same boat, working hard and still feeling on edge, here's a couple of friendly points to ponder: First up, remember that all the spreadsheets in the world can't promise you a worry-free future. They're handy for planning, sure, but they're more like weather forecasts for your finances—they give you a sense of direction, not a pinpoint location. Second, having a fat bank account doesn't necessarily mean you'll feel secure. I've seen it firsthand: People with more dough than they could ever bake into pies can still be scared of losing it all tomorrow. There's a big difference between feeling secure and being secure. I’m not saying that planning doesn’t help (or that bigger bank balances don’t help either for that matter). But, what I am saying is that embracing life's ups and downs is part of the journey, just as my clients come to realise. Sure, a curveball can come at any time, but that doesn't mean we live in fear. The trick is to make peace with uncertainty. There's no ‘secret sauce’ for certainty, and hunting for it is like waiting for a bus at a train station—it's not coming. A very wise man* recently said “The joy we feel has little to do with the circumstances of our lives and everything to do with the focus of our lives.” And here's a little routine I've found handy: List the things within your power to control — saving for retirement, smart investing, cutting back on expenses, maybe a casual job extra cash. Give yourself a gold star for all you've tackled. For the things left, roll up your sleeves and make a plan. When worry tries to butt in again, revisit your list, take a deep breath, and remind yourself of all you've accomplished. If you can repeat this process over and over, you’ll have a solid anchor to hold onto when the seas of uncertainty get choppy. *Russell M. Nelson, Religious Leader
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