“Should we help our children into their first home?” It’s a topical question in these days of shrinking home affordability but like most big issues, there is no simple answer.
As a general principle, I find it’s better to assist your children financially sooner rather than later. After all, if you are 55 now, your kids are probably about 30, and it makes little sense to put off helping them until you are in your 90’s, and they are past retirement age.
Have you ever heard yourself or someone else say “I’ll be able to repay my loan, provided I keep my job, don’t get sick and I’m not hit with any large unexpected bills”? Chances are you probably have. But things can and often do go wrong.
But first you need to understand why your children are unable to buy a home right now without help. Is it because they have not been able to save a deposit or because their income is insufficient to make mortgage payments, or a combination of both? This is an important issue because the last thing you want to do is help your children into a situation where they become financially over-committed.
If they’ve been unable to save a deposit, is it simply because their incomes, combined with rent, make it impossible to save, or are they the type of people who are bad money managers and think nothing of spending big on a night out? If bad money management is the problem your first task should be to sit down with them, help them to set some goals, and suggest you revisit assistance when they have demonstrated the capacity to save.
But if rent is the main issue, the best way for you to help may be to invite them back home and give them a couple of years of rent-free accommodation, on the condition all the money they are now paying in rent be saved in a special account earmarked for a house deposit. This could easily amount to $50,000 in two years.
If their incomes are fine but insufficient deposit is the problem, and you’re satisfied that they will take a responsible attitude to borrowing, an option may be to go co-borrower.
The effect of this is that your house will also be mortgaged as security for the loan. It will give them ample security and save them up to $30,000 in mortgage insurance premiums. The downside is that your home is available to the bank if your children default on the loan and house prices plunge.
An option, if you opt for the above strategy, may be for your children to move out of the new home after living in it for a few months and spend a couple of years back with you. The house could then be rented for up to six years without capital gains tax being an issue, and the rental combined with the tax concessions should enable them to pay the loan down more quickly.
Unfortunately, parents often put their names on the title deed as well as their children, as an alternative to going co-borrowers. That is a very bad strategy because the parents are still liable if things go wrong, and they could also face a hefty capital gains tax bill if they decide to transfer their share of the property to their children in the future.
Another option includes simply gifting the deposit, provided your children are responsible money managers, but you need to keep in mind that your money may well have to fund your retirement until age 90 or beyond. It really gets down to balancing priorities. Just keep in mind the best strategy of all is to teach your children good money habits from an early age.
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This publication has been prepared by AustAsia Group, including AustAsia Financial Planning Pty Ltd AFSL License No 229454 and AustAsia Finance Brokers Pty Ltd, Australian Credit Licence No 385068.
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