Every parent wants to see their children do well in life, find success in their chosen field, have a family of their own, and become homeowners themselves. It’s no rocket science that the Bank of Mum and Dad is one of Australia’s largest equity release lenders.
Parents will do whatever they can to bring those dreams to reality. They want the best for their families, so it’s vital to go about it properly.
Being the Bank of Mum and Dad is not as easy as it looks
Seniors usually lean on their retirement savings to loan money. This may include any investments they could draw on and their super. But this may also come with drawbacks.
The way of accessing funds from the Bank of Mum and Dad is not sustainable, and may put your well-being and comfort at risk during retirement.
Being a mortgage co-borrower can also put you at financial risk. It means you’re responsible for mortgage repayments if your child misses making them.
Joint ownership of a home bought by retirees who are already homeowners would likely affect their pension entitlements. If your child is not able to meet the repayments, you’ll have to turn to your retirement funding and do it yourself.
Some retirees agree to act as a guarantor and put up their home as collateral. As a guarantor on a mortgage, it can affect your ability to borrow. And if your child defaults, it may put your property at risk.
The effect of being the Bank of Mum and Dad on your tax and pension
Loaning funds to your children is an important financial decision that needs to be done responsibly. It means being diligent and doing your research.
Some of the common considerations of retirees looking to help their children is if and how this will affect their taxes or their age pension. You must seek advice from your accountant and from Centrelink to ensure your decisions won’t have negative consequences.
Given that it’s a gift, and you receive the age pension, you should declare it to Centrelink. The maximum gifting limit is $10,000 per financial year (or $30,000 in five years). In the event you exceed those limits, your gift may affect your assets test and your pension entitlements.
Centrelink may treat your loans the same as any other investment, with a deemed rate of return. It may also affect your entitlements. It won’t matter if your kids won’t pay interest, or if they stop paying the interest.
Whether it’s a loan or a gift, make sure to clearly document the terms of the deal. Keep in mind, the effect of your loan on your pension entitlements won’t be just five years, but for the time the loan is outstanding.
Using ASAG Equity Release
If you agree to be the Bank of Mum and Dad, you need a better strategy to help your children without risking your own wellbeing in retirement. Using equity release can be the right solution for you.
Through an ASAG Equity Release, a type of reverse mortgage, you can access some equity in your home to boost your retirement funding.
If your retirement funding needs are in reserve, you can use an ASAG Equity Release to be the Bank of Mum and Dad. Instead of waiting for a bequest, your children and grandchildren can receive a fraction of your wealth now, when they need it most.
It’s important that any wealth transfer in your family is responsible. Make sure your own needs are met before giving assistance to your loved ones.
If you liked our “Becoming The Bank Of Mum And Dad” and took away some valuable and useful information, check our blog space regularly for more updates on reverse mortgages and equity releases.