With so much media about how the Australian dream of property ownership seems increasingly out of reach for many young Australians, understanding how you can help your children buy their first property is a positive, proactive step many established home-owners can take to help the next generation.
The right thing for you and your family? There are many ways you can assist your adult children – or even grandchildren – get their foot in the property-buying door. You might want to look at different types of mortgages that allow you to leverage from your own home to help your children – without risking your own property.
In 2015, a survey by REST Industry Super revealed that one in three retirees in Melbourne, Perth and Sydney and one in five Adelaide and Brisbane-based retirees were keen to give their adult children financial assistance to buy their own properties.
It’s a growing trend – a response to the reality that salaries have not kept pace with house prices. Go back four decades and the percentage of median family income needed to service an average loan commitment was somewhere around 10-15%.
According to recent figures from the Real Estate Institute of Australia, today’s figure is closer to 30%.
Luckily, there are solutions.
Buy Them A House
If you own your own property and are comfortable, you might consider purchasing property to give to your children. Your mortgage could be supported by drawing down from your superannuation, or using money you may have inherited or invested in the past – and you can buy the property, or properties, in your name with your children installed as tenants who only pay minimal rent.
By charging a nominal rental amount, you can have your needs covered – your living expenses and some pocket money – and your children can enjoy the benefits of home ownership in properties they will, ultimately, inherit anyway.
A conversation with a trusted mortgage broker, a property lawyer and your own accountant and/or financial adviser will help you understand the tax and legal implications of this arrangement – things you definitely need to consider before making such an offer.
With tax charged on money you make from rental, plus ongoing expenses of rates and insurances, it’s important to know if this arrangement will work for your family.
Another risk worth thinking about is if a future government introduces death duties. Talking to your financial adviser may shed added light on the risks and potential benefits.
Give Them Money
One popular way to help your adult children enter the property market is to gift them some money – funds from investments or savings that can go towards their deposit, or, if you are generous and can afford it, cover the entire deposit.
Again – any decision like this needs to be well thought through and discussion with a range of property and financial professionals – including a lawyer, accountant and financial planner, is recommended to ensure that by helping your adult children buy property it is not risking your own financial security.
Imagine if you needed access to a large amount of funds in your future for reasons that you can’t predict right now – protecting yourself is important so never go into any arrangements lightly, even if it is for family.
Offer A Private Loan
Providing a loan, that is forgiven following your death, is often recommended as being better than a gift – especially when you run the risk of providing a large sum that you may not be able to recover if you need it.
Talking to a trusted mortgage broker can help you understand your options here and can help you understand how refinancing your own property could enable you to loan funds to your adult child/children.
Your Will can be created to include a clause that forgives the loan on death, but if your adult child/children move up in the property world after your helping hand, you should get the loan back while you can – especially if you have other children you may also wish to help.
Before entering into this type of arrangement you should obtain separate legal and/or financial advice.
Provide A Family Pledge Guarantee On Part Of Their Mortgage
Being a guarantor on part of your child’s mortgage is one of the most popular ways you can help.
An experienced mortgage broker can show you ways that your child’s borrowing capacity can be increased, and possibly remove the need to pay a deposit or pay potentially expensive lenders’ mortgage insurance (that is usually needed when someone borrows more than 80% of a property’s value).
Budgeting Is Best
One of the most positive, sustainable ways to help your adult children get into the property market? Teach them how to budget and be wise with their money. The recent Bernard Salt article talking about Generation Y favouring café breakfasts that cost money they could be saving for their first home hit a nerve with many and, if your adult children are living a lifestyle where money flows out as quickly as it comes into their bank accounts, some education about better budgeting and smart saving could be a gift for life.
Ideally, these lessons start from childhood and are best taught by our own example.
Talking to your children about how you got your own start on the property ladder might be worth having.
Encourage them to talk to a mortgage broker to assess their current position and give them realistic advice and tips about what they need to buy that first property.
With your insights and shared experience, they may not need your financial help, after all.
The advice provided on this article is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs.
If you have any questions about your finances, either personal or business, please do not hesitate to contact Lending Specialist on (03) 8805-1800 or email barry@lendingspecialists.com.au
