Gifting or lending money to your child?

Pros and cons of a gift

A gift is a simple transaction

With a gift, there is no expectation of repayment. It’s not uncommon for parents to gift property, cars or money to their (lucky) children. In fact, annually Australian parents gift around $12 billion.

However, gifting is not for everyone. Some of the pros and cons of a gift (versus a family loan) are below.

Pros of gifting money:

There is generally no gifting tax in Australia (though you may be subject to capital gains tax if you gift someone an asset, like a house)
It is much simpler to give a gift than to set up a loan
A gift won’t generally impact on the amount of the mortgage that a bank will offer your child

Cons of gifting money:

There is generally no asset protection if your child splits from a spouse/partner. For example, if all assets get halved in the separation, your child and their spouse may each effectively keep half the benefit of the gift
If you receive the Age Pension (or other benefits) there are limits applied to gifting without affecting your pension: currently $10,000 per year, or $30,000 over five years, depending on your situation. As a rule, you should always declare these gifts to Centrelink and check for any changes in limits
Free money may send your child the wrong signal about entitlement
Some children may not want to take the money as a gift, but instead make their own way in the world

Pros and cons of a family loan

A family loan offers a lot of flexibility

With a family loan, there is an understanding the money will be paid back - sometimes with interest being charged, sometimes without.

Pros of a family loan:

Unlike a gift, a family loan can protect the assets of the family from future relationship breakdowns. If there is a separation, the loan still needs to be repaid to the parents, which reduces the net assets available for division between the children
A family loan offers your child, and their partner, a great lesson in the value of saving and the overall value of money
If you go the extra mile and set up the family loan quite formally (and repayments are made on time), it will improve your child’s credit score. In the future, they may have more ability to borrow from a bank
In a win-win family loan you can earn money by setting the interest rate higher than a savings account interest rate

Cons of a family loan:

Banks may include the family loan, for a deposit, as an obligation (or liability) of your child in determining how much they can borrow on their home loan
Similarly, if the family loan has regular repayment obligations, banks may include that as an expense when determining how much your child can borrow from them
A family loan could impact your pension entitlements, as Centrelink views family loans in the same way as most other investments—with a deemed rate of return (even if you aren’t charging interest)
If interest is being charged on the loan, you may have to report this as income

Structuring the gift

A gift that will keep on giving

A gift can be structured like an early inheritance, so there’s no need to pay it back, ever.

You don’t need the money back, but you may wish to make sure it’s fair for everyone in the family and that your other children are aware of it
If the money is factored into your child’s inheritance, be sure to make a note of it in your will so that other children or beneficiaries don’t feel that they are getting short changed
If it’s factored into their inheritance, consider whether the amount taken out of your child's part of the estate should increase each year (say by 2% annually) to align to inflation
For instance, if you received a $50,000 gift from your parents 10 years ago, that would be worth approximately $61,000 in today’s money

Structuring the family loan

It’s important to consider how to best structure your family loan.

In most cases when a family loan is set up to help your children buy a new home, they will also take out a bank mortgage. Here are three ways to consider structuring this:

1. Ongoing Repayments

Consider if there will be ongoing, regular payments (weekly, monthly, quarterly, etc.) or if there will be a one-off, lump sum payment at the end
Consider if you will be charging interest or if it will be interest-free
Typically, if a child is to struggle with repayments during the term of a loan, it is most likely to occur in the first few years of the loan. As their income increases over time, they may be able to afford larger repayment amounts. You may want to start with a lower amount and gradually increase payments/interest rates in later years

2. Lump Sum Repayments

A number of circumstances may allow your child to repay your family loan in a lump sum:
When they remortgage: Your child’s home may have appreciated in price during the period that they have owned the property. They may be able to use that increased equity to remortgage with another bank and pay off your family loan to them with the extra money
Moving out, moving on, or moving up: Your child may want to, or need to, sell the house for personal reasons
Lump sum: Your child may receive a lump sum from another source—e.g. work bonus, small business income, inheritance or sale of an asset
If the family loan has regular repayment obligations, banks may include that as an expense. If you do plan for a lump sum payment at the end of your family loan, you need to consider if you will charge interest and decide on the trigger events for repayment

3. Win-Win Family Loans

If you have the funds, you may provide a loan to your child for the whole, or a substantial portion of, the property your child wishes to buy
In a “win-win” loan situation, as the lender you can get a higher rate of interest than you would on bank savings deposits, and as the ‘borrower’ your child can pay a lower interest rate than a bank may charge them
You have complete flexibility to structure the interest rate and loan repayments to best meet your child’s situation
There are service providers who, for a fee, can help you set up the loan and track whether regular payments are being made
It is prudent to structure these loans formally and to get advice on registering a security, such as a mortgage or caveat, over the property

Gifting or lending money to your child?

Further reading...

CASE STUDY: Futureproofing Your Retirement

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