It’s natural to want to give our children a helping hand into the property market, but make sure you don’t risk your retirement security in the process.
Soaring property prices during the last couple of years have put a spotlight on the difficulty that younger generations have in entering the property market. While continuing low interest rates provide some impetus for young people to enter the market, the challenge of saving for a sufficient deposit and qualifying for sufficient finance has meant many will turn to their parents to assist them in purchasing a property.
Parents can help in a variety of ways. It may be in the form of capital assistance to help achieve a large enough deposit, which will help avoid the need for mortgage insurance. Alternatively, it may be month-to-month repayment assistance to supplement what the children can afford, so that the cashflow burden can be lightened.
Apart from direct cash assistance like this, the parents may also opt to use the equity they have in their own property as security for the children’s loan. Some may even want to share ownership so that they have some stake in the property as an investor as well as helping the child to get a foot hold.
It is important to think through the full extent of the commitment
What are the risks?
The concept of helping our children to establish themselves is of course a worthwhile one. In doing so, however, it is important to think through the full extent of the commitment. As is the case with any mortgage, there is always the chance that circumstances change and the child is no longer able to maintain their contribution to the mortgage. A sudden injury or illness, for example, may prevent them from working and earning income and being able to maintain the mortgage.
If such a situation arises, there are many potential questions such as:
- Are you prepared to cover the mortgage repayments so that the property can be retained?
- Would you want the property to be sold so that your contribution can be recovered?
- If you do want to keep the property for the sake of your children’s security, will you want to take on a stake in the ownership to compensate you for the extra financial commitment you need to make?
- How will the rest of your retirement plans be affected by this sudden new financial burden?
These are all difficult questions to answer, so it’s wise to have solutions in place in advance, rather than trying to make such significant decisions in a rush and under stress. Without adequate plans in place you may end up with a commitment that threatens your own retirement security and may require you to re-think your entire investment strategy.
Disaster-proofing your financial situation
One initiative that can help protect you from such risks is to ensure that your children have sufficient personal insurance protection in place to cover their income and their life if the worst was to happen.
If your child has a family, then chances are that you will want the home retained for them if the child or their partner was to die prematurely. Life insurance can provide the ready funds to have the mortgage paid out, thereby freeing you of your commitment to the property. Similarly, if a major illness or injury strikes, and the child has income protection insurance, total and permanent disability insurance and trauma insurance, this will help protect the home if the worst happens.
Ensure that your children have sufficient personal insurance protection in place
Protection for both parties
While such insurances are protecting you from becoming over-committed, they also have the benefit of protecting the livelihood of your child and their family. It’s a win-win situation and it gives them an appreciation for the need to have financial protection in place throughout their lives.
One approach you can take is to perhaps fund all or part of the insurance plan yourself to help encourage the child to take out the cover. After all, it is protecting your situation as well as theirs.
It is essential to have a documented agreement that spells out the actions to be taken in various circumstances
A written agreement helps give clarity
Other potential upheavals may also put your investment into jeopardy. A divorce, for example, may involve a need to split property between your child and their partner. This may cause complications if the property is held in their name and you want to claim back your stake in it.
To protect yourself from such situations it is essential to have a documented agreement that spells out the actions to be taken in various circumstances. This may seem pedantic at the time, but it can save a lot of heartache, dispute and financial loss for you down the track.
A financial planner can help you think about such issues and can advise you on what type of insurances will help protect your child and protect your interests. They can recommend other professionals that may need to be used, such as a solicitor or accountant, who can help get the necessary agreements in place. Your retirement security is too important to leave exposed to such risks, so make sure your generosity to your children is accompanied by a common sense approach to any financial assistance you give them.
Do you have personal experience of family or friends who have helped their children to buy property? Share your experiences below.