The 2017 Census reports that fewer young people are entering the property market because the increasing cost of living is growing at a faster rate than salaries which are remaining stagnant.
Helping your children with their first property could be what they need to kick start their property portfolio and secure their future with property assets. Below are a few ways that you can help.
Help with the cost of living
If your children are saving to buy a property then allowing them to live at home rent free can help take the financial pressure off whilst they save. Saving a deposit for a property is the most challenging aspect of purchasing a property for young people, with most banks requiring approximately 20% of the loan amount for the deposit. With the average house price in Sydney now at around $1milllion*, they need to save $200k to meet the loan criteria if they are borrowing the full amount.
Gift them the money
The most obvious way to help your children is to gift the money for their deposit, for a percentage of their deposit or for a larger amount to help with repayments.
If you are gifting your children money you obviously should carefully consider how this gift will impact your own lifestyle and whether the gift will detrimentally affect your financial situation.
Lend them the money
Instead of gifting money you can lend your children a sum of money that they are to pay back over time. This agreement could be made several ways including:
- an interest-free loan;
- a fixed term payment plan;
- payment to be made as your child can repay it; or
- an agreement involving a third party.
Loans also need to be carefully considered as repayments can be difficult to recover and can also be the cause of family friction when money only intended as a loan is not repaid as anticipated.
University fees have been attributed as one of the key reasons that housing has become increasingly unaffordable for today’s youth.
Paying up to 6% in HECS debt could impact the amount of money your children can realistically save as well as how much they are able to borrow. By helping your children out with their HECS debt, you could help them increase their borrowing capacity and save, allowing them to enter the property market earlier.
Become a guarantor
Becoming a guarantor on your child’s mortgage means that you do not have to make any payments towards their house, but that there is more security for a bank to provide a loan.
It is important to understand that if your child defaults on their mortgage payments, you could be liable for some of the outstanding debt if the bank isn’t able to resolve the situation with your child. Make sure you fully understand the guarantor terms and perhaps seek legal advice before entering into an agreement. Ensure that your child will be able to make the repayments comfortably and has the right support in place in case an unexpected incident occurs, such as income protection.
Let them buy into the family home
Children buying part of the family home is becoming an increasing trend. With many parents looking to downsize from a family home to a smaller property, children may have the opportunity to remodel the existing dwelling to suit both parties, for example adding a granny flat or building a duplex or townhouse with the parents owning one and the children owning the other. If you are considering downsizing anyway this may be a mutually beneficial solution as you could avoid the stress, hassle and cost of an onward purchase (such as stamp duty) and selling your current home. This could also allow you to draw some equity out of your property to help fund your retirement.
Becoming a joint borrower means that you are equally responsible for the repayments on the loan whether your children can make the repayments or not. This is a step that shouldn’t be taken lightly and should only be taken if you are able to make the full repayments should anything go wrong.
Teach them to budget and save
Teaching your children to budget and save early on will help them to develop habits to put money aside and hopefully save for a deposit. Educating your children on ways they can invest their money are valuable lessons and steps to becoming money smart.
About Laing & Simmons Double Bay Property Management
Laing + Simmons Double Bay Property Management is part of a high-profile franchise group yet remains independently owned by Principals Suzie Reid and Bart Doff.
The office is acknowledged as the market leader in prestige Eastern suburbs leasing, a reputation which has been forged in over 25 years leasing and managing a large portfolio of the best properties available in the Eastern Suburbs rental market.
Contact us today to see how we can help manage your investment property, or to find a rental property to suit your needs.