Home / Investing 101 / Bank of Mum and Dad looks to investment bonds for property deposit

For many, planning to help kids and grandkids out with a first home deposit is something that needs to be done strategically, with timelines, capital growth and tax implications front of mind. Here, investment bonds could be the key.

The desire of parents and grandparents to help their children purchase their first property has not abated despite soaring prices and increased competition from overseas buyers in recent years. According to Digital Finance Analytics, parents dole out $90,000 per adult child on average for a house deposit and the ‘bank of mum and dad’ is estimated to be collectively worth more than $35 billion, which would make it the nation’s ninth biggest residential mortgage lender.

For parents, accommodating this expense has become something that needs to be planned strategically, with timelines, capital growth and tax implications front of mind. With this in mind, many are considering investment bonds as an alternative to traditional investment vehicles or term deposits.

An investment bond gives the holder the option to invest on behalf of a child or grandchild – or any young person for that matter – to help set them up for a better financial future. The holder owns the investment and sets a date when that ownership transfers automatically to the beneficiary. To add flexibility and safeguard the investment bond, the initial holders of the investment bond have the option to transfer ownership to the child or young person at any time, or continue to retain ownership until they’re ready to do so.

This flexibility has extra benefits, according to Foresters Financial. “You can nominate a beneficiary anytime to receive the proceeds of the Investment Bond in the event of your death – tax free – without the inconvenience of a probate, Will or trust. No yearly renewal is required, and you can update the nominated beneficiary at any time,” the provider notes.

As tax is paid within the fund, there is no tax payable on a ten year investment bond if it’s held to term. This is a key feature for parents or grandparents who wish to avoid paying tax on earnings for capital that is earmarked for future use as a child or dependent’s house deposit.

Parents or grandparents who instigate the bond – or even parents or grandparents who didn’t – can also contribute more to the bond, up to a maximum of 125 per cent of the previous year’s deposit, which means the initial deposit amount is key.

Knowing that the investment is planned to be held for ten years gives the holder comfort in selecting a growth investment option with a higher risk profile, as well. (While there is the option of accessing the funds in an emergency, holding the bond to term retains the tax advantages of the investment bond vehicle.)

Quite often, investment bonds are initiated with an inheritance or gift from an older family member. This means a substantial amount is then in place so that there is increased freedom to contribute more funds down the track within the 125 per cent rule, and greater scope to save enough capital to have a healthy home deposit when the bond comes to term.

Over time, the benefits mount up; not paying tax on earnings during the lifetime of the bond are huge pluses for the parents or grandparents who instigate the bond, while not paying tax on the withdrawn amount down the line is of obvious benefit to the child or grandchild.

For parents and grandparents who like to plan ahead, investment bonds can in many situations make savvy financial sense. To give children and grandchildren a leg-up in the Australian property market, kicking off an investment bond could facilitate a future that not only includes a home deposit for a child or grandchild, but leads to savings on the way.