Moving into a granny flat on a property owned by one of your adult children is an option many of us have considered as we retire.
But while it might seem like an easy situation to negotiate, it’s actually not as easy as it looks.
Experts warn that there are a number of complex issues that you’re not likely to have taken into consideration.
Surely it can’t be that complicated?
Well, retirement lawyer Richard McCullough argues that it is.
He said there are a number of things you need to think about before you go making any plans or moving in.
First, McCullough said you need to consider if it will impact your pension.
“If you’re a pensioner you need to think very carefully if what you’re proposing will be a financial asset thereby diminishing your pension,” he said.
“If you are a pensioner, what you’re doing may or may not trigger the asset test or income test
“You need to ascertain that to avoid nasty surprises.”
The second thing to keep in mind is whether your child owns their property outright.
“If you’re looking to provide money to your child for a house already owned by them, checked to see if their still a mortgagee on your title,” McCullough advises.
“The reason for that is mortgagees generally don’t like a non-income producing older person to be on the title.”
So, what’s the best way to make a granny flat on your child’s property work?
McCullough advises you do it as tenants in common – where you and your child both make a financial contribution to the property.
“For example, if a parent and child buy a new place together, they put in 50-50 and they’re both on the title at 50-50,” he said.
“That’s the safest way you can do it.
“If you’re on the title, it won’t affect your age pension at all because it’ll be the same as if you’re living in your own home.”
Another advantage to being on the title, is that your half can be passed on in accordance with your will if your die.
If you do it as a loan on the other hand, it’ll be considered a financial asset under your pension.
There is another option if you don’t want you name on the title, although it does come with some risks.
McCullough advises you can set up what’s known as granny flat interest, where you provide money to pay for just the granny flat or renovations to the property.
“While this won’t affect your pension, it has to be done very carefully,” he said.
‘Even though your pension may be preserved, if you want to or have to move out there can be difficulties getting your money out.
“If your child is mortgaged to the hilt, they may not be able to remortgage and you could potentially be left high and dry.”
There are a few of life’s other little dilemmas that could impact you as well.
Say for example your child gets a divorce or they default on their mortgage, it could impact you.
“If your not on the title of the house and your child and their partner divorce, the house could be forcibly sold under orders made by the family law court,” McCullough advises.
“If your child and partner have a mortgage and they default, and mortgagee exercises power to sale, then you could be forcibly ejected from the property and have no certain recovery of money.”
Now you know all this, there’s a list of questions you should ask yourself before you make any plans.
- Are you on the pension or not?
- Will your child have a mortgage or not?
- Do you have any other children who might be affected in your will if you depart with major assets while you’re still alive?
Despite all this, McCullough said that granny flats can be set up in a fair and legally enforceable way that can protect everyone involved.
“It is very difficult to achieve and it does need careful analysis of your financial position,” he said.
“Most parents favour preserving their pension at the expense of having security of tenure and retrieval of their investment.
“They want to do the right thing by their children.”
So, where can you get advice?
McCullough suggests consulting a lawyer and being upfront about what you want to do and what questions and concerns you have.