Risks of giving daughters deposits for homes weighed against retirement needs
Idea
Our two daughters are 27 and 29 and are a long way from buying a property in the Sydney area where they rent. This got me thinking that if we took out a reverse mortgage using our fully paid off house ($2 million) as collateral, we could then gift each of them $100,000 as a deposit on a property somewhere. My pension is worth $500,000 and I can help pay them back a bit with some of the Centrelink pension. I am 75 years old and my wife is 66 years old.
This is an early inheritance strategy and can work to overcome generational imbalances caused by high house prices.
My primary concern is that your 66-year-old wife still has 30 years, perhaps more, ahead of her, so her $500,000 pension won’t see her out, even with some age pension. And so he may need to access equity in your home to finance the later stages of his life, especially if either of you needs care.
Even if the gifts you’re offering won’t stop him from making this move, because of reverse mortgage interest compounding, he may have less equity available to him when he needs it.
Twenty years from now, the balance on a $200,000 reverse mortgage will be $641,000 (6% interest). Your and your wife’s equity position will depend on the growth rate of your property value.
Typically, the increase in value of the property will be sufficient to ensure that your net equity ($1.8 million in this case) is at least maintained, but this is not guaranteed.
It is also important to consider Centrelink treatment. Centrelink ignores the value of your home for income testing. Therefore, it also rules out any reverse mortgages against the home.
But when you gift $200,000 to your daughters, $190,000 of that will be considered deprived assets for five years. If your age pension is affected by the Means Test, this will mean that your pension payment will be reduced.
I need to take some time off from the workforce due to stress, at least a year, maybe a little more. I’m trying to figure out how to finance this. I could sell an investment property but I have concerns about CGT. I have a stock portfolio from which I can pay dividend reinvestment, but this income alone will not be enough. I can also sell shares.
Check if you have any income protection insurance (sometimes called Pension Continuity) as part of your pension; Because if you cannot work due to stress, you may have a valid claim.
Assuming there’s no good news here, perhaps you can get a line of credit against the investment property and draw it down during your vacation. You can then pay it off when you return to work, or if this is not possible, you can pay off the debt by selling your property or some shares.
This allows you to postpone any sale and only take this step when absolutely necessary. There are a lot of transaction costs, especially when buying and selling property, so you want to consider any moves carefully. Since it will be difficult to get a loan if you are not working, you should try to arrange the loan before taking a break.
If you need to sell something – property or shares – doing so in a financial year when your income is low will minimize capital gains tax liability. This may fit in well with your plans.
Paul Benson is a Certified Financial Planner. Guidance Financial Services. He is hosting Financial Autonomy podcast. Questions: paul@financialautonomy.com.au
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
Expert tips on saving, investing and making the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.
Paul Benson is a Certified Financial Planner and host of the Financial Autonomy podcast.
