Gifting or loaning money for a property purchase
Australian house prices havegone up by 13.5% over the previous 12 months.
The average price for a home in Melbourne is now $936,000, while thenational average is $852,000.
Those prices have seen many aspiring homeowners turn to family members to help them get into the market.
But before you gift or loan any money, there are 5 key things to consider.
1. Decide what you can afford
Lending significant amounts of money can have various implications on your finances. You may be forgoing interest, you might not be able to repay other loans, or you may simply miss the safety net that comes with having cash on hand. Helping others is great, but make sure you can afford it, and are comfortable with the size of the loan.
2. Agree on the terms and conditions
Make sure everyone is clear about the nature of the loan and how it will be repaid. Setting out clear payment terms and dates helps ensure everyone knows their responsibilities and can be held accountable.
3. Ask the tough questions
Understanding a family members capacity to repay a loan is just as important as your ability to finance it. Make sure you understand their situation as far as income, expenses, and the value of the property before agreeing to anything. Just like a bank, you need to ensure they can afford the loan, and are able to repay it.
4. Get something on paper
It’s important to get something on paper when dealing with large sums of money. Whether that’s an email, a written statement, or a formal legal agreement is up to you, but having something you can refer to can help avoid disputes down the line.
5. Consider other family members
Lending money to one family member can set a precedent that other siblings may also expect. And while you might be able to help one home loan, are you in position to help with additional loans? Managing the family’s expectations when it comes to loans can be just as important as the actual sums involved.
Tax and Age Pension implications of gifting money
Being able to help a family member get on the property ladder is a great position to be in, but there are tax and income issues to consider when gifting, especially if you’re on the Age Pension.
Services Australia provides a comprehensive list of what counts as gifting, but the most common examples are money towards a home loan, the transfer of an asset such as a car, or the payment of tuition fees for grandchildren.
Gifting also includes ‘forgiving’ a loan that someone owes you or transferring an asset from one person to another below its market value.
If you’re currently receiving the Age Pension there are limits on what you can gift in a single year. Whether you’re single or a couple it’s $10,000 in cash or assets in a year, or $30,000 over five years. You’ll also need to notify Centrelink within 14 days of the gift.
Going over these limits can impact the way your income and assets are assessed by the government, which can affect your Age Pension payments. So, it’s important tospeak with a financial planner to understand the implications of gifting any money above the current limits.
And remember,an initial appointment with a financial planner is available to members at no additional charge.
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