Weigh up the true value of a home loan to a family member

We have decided to lend $250,000 to our son and daughter-in-law to purchase a home, with 3 per cent interest, to be paid back at $675 per week over eight years. Their combined income is $1600 per week after tax. Paying the loan off in eight years would save them $98,000 in interest, compared to 30 years at $245 per week. As an incentive to pay this loan off in eight years, we would add $18,000 super to our son’s employer contribution ($7,000) to bring it up to $25,000 each year – if they made the repayments. With the $18,000, I estimate he would save $3500 on his tax each year – or about $70 per week – which would mean after the first year they would only have to pay $605. Our son is happy with this deal but his wife would rather go to a bank and not have the super contribution. Is this a fair deal for them after you check the figures? G.H.

According to researcher RateCity, some 33 lenders are offering 10-year fixed-rate home loans (I couldn’t find an eight-year term), the cheapest of which is RAMS at 5.64 per cent, followed by Westpac at 6.5 per cent. So, your offer of 3 per cent, fixed, is comparatively generous.

An offer to lend at 3 per cent interest over eight years is comparatively generous.Credit:Matt Davidson

However, I guesstimate the couple are bringing in about $110,000 a year before tax, with your son earning $74,000 and his wife $36,000. So your suggested loan repayment of $675 a week, or $35,100 a year, amounts to more than 30 per cent of gross income and 42 per cent of after-tax income.

Once upon a time, banks would suggest that loan repayments should not exceed 30 per cent after tax, as the family would not have enough left to enjoy life.

So I can see why your daughter-in-law might prefer to pay $245 a week over a longer period. even if it does mean paying more interest over the years.

It is hard to postpone holidays, new cars etc for eight years, especially if there are current or future children involved.

Perhaps you could offer the loan over 15 years, which would require repayments of $400 a week, amounting to 25 per cent of take-home pay, or over 20 years, requiring $320 a week?

Contributing to your son's super can go ahead but I feel it should be separated from the loan.

The couple might feel under too much pressure if “black swans” arrive e.g. illnesses, accidents, etc. Also, be sure you won’t need that loan money yourself over the term decided upon.

I sold my home in Coogee for $2.4 million and bought a unit for $1.46 million. After paying out necessary expenses and furnishing the unit, I was left with about $750,000. Prior to selling my home, I was on the aged pension, although still working casually. After three years in the unit without the pension I find myself with a balance of about $640,000 in the bank. My income from this, with the current low interest rate, is about $800 a month. I work 1-3 days a week and my average income is about $200-$300, minus tax ($29 an hour before tax). My expenses are quite high and I need to continually draw on my savings. How do I return to being on the age pension to assist me with car registration, doctor’s bills etc? I have about $11,000 in super and I am 78 years old. I am becoming anxious as to how long my money will last and don’t want to depend on my children. V.E.

A single person is able to claim a part age pension once their assets fall below $574,500, a figure which should rise with indexation each March and September.

Your bank account is falling at a rate of about $36,000 a year, which implies that, if things go on as before, you should be eligible within about two years.

In this period of low interest rates, and amid the Reserve Bank of Australia’s warnings that it is likely to continue in future, people who have lodged their savings in banks for a lifetime are being forced to look elsewhere for a decent return on their money, which means taking on higher risk.

To my mind, the lowest-risk option that meets this goal is to invest in a balanced fund, which spread its money across a variety of different sectors – from fixed interest to property to shares and the many sub-sectors in between.

In fewer cases, people are ready to accept the lessons of history that, in the long run, shares provide the highest returns.

I prefer a master trust with a range of options, an example of which is the Colonial First State Wholesale investment fund, which offers a dozen funds titled “Balanced”, “Moderate” or “Diversified”, as well as top share funds such as the Fidelity, Blackrock and CFS Imputation Australian share funds.

As this week proved, volatility has to be expected but I think it will prove temporary this time.

Regarding the superannuation downsizer contribution. I understand: 1. A person has to be over 65. 2. The amount is $300,000 each. 3. The house/unit has to be owned for at least 10 years. 4. Contribution has to be made within 90 days of settlement. 5. It is treated as a non-concessional contribution. My question is: Can a person who owned a rental property and at the time of the sale occupied the house be eligible for the downsizer contribution? How long would a person have to occupy the premises to be eligible after the property was used for rental purposes? S.M.

Interesting point. To be eligible to make a downsizer contribution, the home must be either exempt or partially exempt from capital gains tax under the main residence exemption.

There is no mention in, for example, the Australian Taxation Office's Law Companion Ruling 2018/9 of a minimum period during which you must be resident in the property.

However, the ATO points out there are other factors that determine one’s main residence other than length of occupation e.g. mailing address, absence of another main residence etc.

Note that while a downsizer contribution falls into the tax-free component of a super fund, it is not officially a non-concessional contribution (NCC) i.e. it is not subject to any NCC cap (e.g. if your total super balance is over $1.6 million), although it will count towards your $1.6 million transfer balance cap when you start a tax-free pension.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Australian Financial Complaints Authority, 1800 931 678; Centrelink pensions 13 23 00. All letters answered.

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