Expert Advice with Kate Forbes 05/03/2018
While some very fortunate parents may be in the position to buy their children a house outright, this is certainly the exception and not the rule.
And, yet, all parents are likely to cast a cautious eye over property headlines as they ponder... How will my children ever afford to buy a home?
Particularly in Sydney and Melbourne, first homebuyers are struggling to get in to the market, and for many parents, the prospect of their kids “fleeing the nest” seems like it may never actually happen.
So if you’re looking for ways to ever-so-gently nudge your children towards rates' bills of their very own, here are some ways you could them buy their first property.
1. Learned advice
This is the cheapest option, and it starts early!
Instil wise choices and saving habits in your children, and teach them about the value of money.
Introduce them to compound saving from a young age.
Encourage them to save their pocket money and later, income, to save up for treasured purchases, rather than splurging on the latest gadgets and toys on a whim.
Once they’re older and closer to property buying age, make sure they’re across concepts such as stamp duty and mortgage insurance because, as we all know, buying a home is not as simple as saving up a deposit.
There are plenty of hidden costs involved, and forewarned is forearmed!
It could also be a wise idea to encourage your adult children to see a financial adviser, who can help them reach their goals faster.
2. Let your kids live at home longer… but with a caveat
Gone are the days of children gleefully moving out as soon as they reach the cusp of adulthood.
These days, more and more families are living together for longer, with kids staying in their childhood bedrooms well into their 20s, their 30s and even their 40s.
To really benefit your children and give them the best chance of buying a property – rather than simply allowing them to mooch off you long-term – you need to have some goals and plans in place.
For instance, you could ask your children to pay board to cover expenses, with part of that set aside as their savings.
If they pay you $250 per week, for instance, you could set aside half of those funds towards their eventual deposit.
Boarding at home will still be far less expensive than moving out, which would allow them to save up a deposit sooner.
While we all understand the concept of rentvesting, now people are talking about boardvesting, which involves younger people remaining at home with their parents so they can save for their first property.
3. Help out with the deposit
This is a generous way to help your children get onto the path of property ownership, but it can also seriously fast-track their journey towards becoming a first homebuyer.
Because saving the deposit can be hard work and take several years for a young person just starting out, the gift of a financial "leg up" could be just what they need to take action on their property goals.
The ins and outs of the arrangement are personal: some parents “gift” the deposit, while others consider it a loan.
Either way, you and your kids need to be aware that they have to keep the deposit in their bank account for a period of time without spending it in order for the banks to consider it genuine savings towards a deposit.
They will also need to demonstrate that they have income to cover loan repayments.
4. Offer a family guarantee
A family guarantee uses your property as security.
This means you don’t have to fork out your own money per se, and your whole house won’t be on the line either.
The guarantee is usually limited to a certain amount, related to the value of the new property, and the loan remains completely in your child’s name.
First homebuyers still need to show that they have the capacity to repay the loan, and if your child defaults on the loan, this puts the repayment responsibility on you as a guarantor.
We always think it will never happen to us, but as with all aspects of money, stress and mixed expectations can lead to disputes and strained relationships.
So, you may want to have an action plan in case of unforeseen circumstances, such as a loss of employment.
An upside is that once your child's property has gone up in value to a certain amount, you can ask for the guarantee to be released, which may only take a matter of years.
5. Consider co-buying
Buying in partnership with your children could be a solution for those who are unable or unwilling to provide a gift or loan, but who still want to assist them getting on the property ladder.
By purchasing as joint venture partners, you will boost your child’s borrowing capacity, whilst also chipping in towards the deposit.
This is a win-win, as you’re building your own wealth with an investment property, whilst helping your kids build their own nest eggs.
Again, this strategy comes with its own risks.
As with some of the previous suggestions, you will be effectively on the line for your child’s repayments, so you need to be certain of their capacity to repay and their commitment to the loan.
It’s also important to consider aspects such as renovating.
Your child or their partner may have wild ideas about how they would like to change the home, or bold plans to use some equity, so be sure to have some clear discussions upfront to ensure everyone’s on the same page.
A final note: some of these suggestions may impact your child’s ability to access first homeowner grants so it is worthwhile speaking to an accountant and/or financial planner to discuss your plans and goals.
Kate Forbes is a National Director at Metropole Property Strategists. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).
She is a regular commentator for Michael Yardney’s Property Update
Read more Expert Advice from Kate here!
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.