Fantastic financial tips can make all the difference when it comes to helping your adult children get on top of the property market. Here’s how!
- 9 thoughts on Family Trusts for the New Year
- Is owning or renting property better long-term?
- Family fraud – protect yourself against unscrupulous relatives
The facts are many of us will need to help their kids get into the property market. Without that help, the maths doesn’t work and many of our adult children just may not be able to ever own a property.
Family pledge and limited guarantees
Another way of using the equity in your home to help the kids is by providing a limited guarantee or what is being called a family pledge. Your child may need say $60,000 to get them over the line especially if that amount was required to avoid the cost of mortgage insurance.
Well, a family pledge, secured via mortgage (including a second mortgage) against the home which has ample equity in it, might just do the job.
It may only need to be temporary because if the value of the properties rise, then you can have them revalued and have the pledge released, provided the new loan to value ratios are adequate.
You could choose to jointly buy a property with them. It could be 50/50 or 60/40 or whatever percentage works for your situation. You are on title and you are jointly responsible for the loan.
For them, owning 50% of something is better than owning 100% of nothing.
You obviously are taking on the risk of the loan if your child fails to keep their end of the bargain, but there are varying degrees of risk within all these ideas and there is an assumed level of trust and reliability between parents and children for any of these strategies to work.
P2C La Trobe
La Trobe have created a formalised process that can be used to lend money to your kids (P2C or Parent to Child loan product). In effect, you are inserting a middle man to help with the formalities. It is like letting your kids live in your investment property and pay rent, but getting them to deal with a local agent instead of you directly. More formal and potentially less family hassles.
It comes at a price but can certainly have its benefits. It can be a good tool to help the kids save on mortgage insurance (LMI) by lending them enough (via a second mortgage) to get them to an 80% loan, which removes the requirement for LMI.
Parental equity and cross collateralisation
Cross Collateralisation is a mouthful, but it simply means using the equity in your home to support a loan that your kids could use to buy a property. It is not a gift or a loan, but really a guarantee or a promise that if your child doesn’t pay back the loan, you will take ultimate responsibility. You are ‘giving’ them your financial firepower or credit.
Imagine that you have a $1m unencumbered home and your son, who has no deposit but a good income wants to buy his first home for $600,000. If the two assets are ‘crossed’, your son would be able to get the loan.
High LVR (95%) loans
Once upon a time these loans didn’t exist, but today they are a necessity for many first home buyers because of people’s inability to save up large deposits and high property prices. The point here is that helping them get into the market may cost you less than you think.
Let’s say we are talking about a $700,000 property (especially in Sydney or Melbourne), 10% or $70,000 might do the trick. 5% for the deposit and another 5% for costs, mainly stamp duty. If that is all you can do, that might be just enough for them. They will still need to contend with mortgage insurance and servicing a large loan, but if they (and you) want to get into the market, it’s another way of doing just that.
Helping them get government help
Unfortunately Government support has been skewed towards new properties only, but it’s still better than nothing for some. The First Home Owner Grant, which has just been reduced to $10,000 in NSW (it was $15,000 last year) is available if your first property is a new one. You could choose to help the kids buy a new property to access the grant.
There is also the First Home – New Home Scheme (again biased towards new property only) where the stamp duty is waived or reduced for properties up to $650,000 (in NSW). This can be quite significant as the stamp duty on a $550,000 property in NSW is about $20,000.
Instead of a capital contribution, you could choose to help with cash-flow and assist with the mortgage repayments (or part thereof) until their income reaches a point where they can comfortably pay the mortgage.
So, how did the bank lend them the money if they are struggling to pay it back? Well, it happens more than you think. People over-extend themselves all the time and are able to find a bank that lends them more than they really should be borrowing.
Helping them to compromise
Too many people are struggling to make concessions to get into the market. If you have grown up in your parents’ home, near the city, near amenities, near the beaches etc. you might be finding it hard to make the necessary concessions to moving out and being an hour away from work. But that is the journey many will need to take if they want to get into the market. If a $1m property is simply not within your reach (with or without parents’ support) then you have to go looking at suburbs or property types that fit your (and your parents’) budget.
Parents may need to make their support conditional on some compromise.
The journey may begin in an area that is less than ideal but you can then work your way up the ladder over time and get closer to the city or work and lifestyle.
Renting and investing
For a variety of reasons, your children may not want to buy a property to live in. Maybe they want to live close to you so you can stay in touch with the grandkids (and do the babysitting!) or they want the flexibility of being able move around with work or as their needs change.
Financially, renting and not investing is a problem in an environment where asset prices keep rising. But renting and investing is a perfectly legitimate wealth creation strategy for many and compares favourably with more traditional home ownership. Helping them buy an investment property can be just as profound a step in the long run to their financial well-being.
There is a variety of ways of doing this. What it really comes down to beyond capacity, is intent. Where there is a will, there is a way.
Making any or a combination of these ideas work for you, requires customisation to your individual circumstances. There will be tax, legal and liability considerations for many of them and you would be well advised to first canvass the viability of an idea with a financial adviser. They are best suited to navigate you through the varied and interconnected areas of expertise that are required to solve this type of problem.
What questions do you have about helping your adult children into the property market? Post your questions below.