Helping adult children buy their first property
More than anywhere else in the world, Australian children are raised to believe that if they work hard enough, they will one day have a suburban manor of their own.
However, sky rocketing property prices and an economy that supports investors over first homebuyers converge to create a situation in which many young people feel that the Australian dream is an unattainable delusion. While parents may be reluctant to help their children financially, it’s not just a champagne lifestyle that’s keeping young people answerable to the landlord.
Yellow Brick Road principal and wealth manager Darren Williams supports the idea of parents helping their children enter the property market.
One way for parents to help is by offering “non-genuine savings” such as a deposit and costs, he says.
“This often requires the signing of a statutory declaration to say the child is not required to repay the deposit. It needs to be looked at as a non-refundable gift, because the bank doesn’t want to be caught up in internal family bickering,” says Williams.
Lucy, a 25-year-old nurse, bought her Melbourne townhouse with the help of a deposit from her parents.
“I had been working full time for two and a half years and was still living at home when the topic arose: to buy or to rent? The advice I received from my parents was that rent money was dead money and I was better off paying my own mortgage rather than somebody else’s. My parents made it clear that the mortgage would be solely my responsibility,” she recalls.
Lucy’s mother Grace established clear parameters around the agreement. “There were no doubts or concerns because we made it very clear that committing to a mortgage was going to mean far less disposable income. We helped Lucy make a cash flow budget to determine her ability to meet repayments and cover the costs of running a house,” she says.
National Australia Bank head of mortgages product management Robin Lim says another option for parents with equity in their own property is to act as a guarantor.
“This will reduce the required LVR – loan to value ratio – of the mortgage. This has a number of benefits, such as allowing the first homebuyer to have a loan with an LVR equal to or less than 80 per cent, or by impacting the borrower rate,” he explains.
Financial Counselling Australia chief executive Fiona Guthrie says that as with all financial decisions, it’s important to consider the risks.
“We sometimes see parents who guarantee loans. Then their children become unable to pay. The bank calls in the guarantee and this can put the family home at risk,” she says.
Parents considering acting as a guarantor for their children should consider seeking their own independent advice before proceeding.
“Parental assistance is a great way for first home buyers to enter the tough housing market, as long as both parties have adequate insurance to reduce any risks,” she says.
Lucy says: “My parents were extremely supportive in guiding me through the foreign world of the property market. Working together to make improvements to the house has been a fun venture that has strengthened our relationship.”
Not all parents have the financial security necessary to provide assistance. Is it possible to enter the housing market as a self-made buyer?
“It is possible,” encourages Williams. “It just involves a lot of hard work and saving.”
Lim says that parents can also provide non-financial support: “It’s always great for parents to demonstrate and provide tips on how they have saved in the past. They can offer their children the right level of education and support to encourage and incentive them to save.”
First appeared on Domain.com.au.