With housing affordability at a record low and the cost of living soaring, many parents wish they could help their kids get their own homes, sometimes so they can downsize themselves. Not many of us are wealthy enough to help our kids buy a property outright, but there are ways you can help them fly the nest in a tough market. Read on to find out more.
Encourage them to build up savings first
Saving up a deposit while renting and covering bills is difficult for many young people. This can lead to them either living at home for longer or being at the mercy of the rental market. But with a strategy and a plan, home ownership is possible.
Firstly, they need to be realistic about what they can afford, and then work towards saving a deposit. Lenders will always look favourably on a good savings record and clean credit history. Plus, a deposit of 20% will mean they don’t need to pay mortgage insurance.
Understand what ‘free money’ is out there
There is a lot of help available from the government for first-time buyers, so do your research with them to understand what options are available.
Look into grants for first-home buyers and super saver accounts that let you save at a higher rate. It’s also now possible to draw on your super to buy a house, so talk to your super fund. And first-time buyers may also be able to access stamp duty concessions, which can make a huge difference.
Craft a strategy to suit your situation
When deciding how you’re going to help, it’s always good to talk to a financial advisor to ensure you understand what you’re getting into. Some of the most common options include:
Match their savings: once they have a realistic budget in mind, some parents agree to top up or match their child’s savings with a loan. Contributing a loan rather than a gift, even one without set repayment terms, will protect your money in case of a divorce later on, for example.
Remember, though, the bank will see it as a loan and will reduce borrowing capacity accordingly. Having said that, a good mortgage broker will help you find a bank that is willing to accommodate your individual situation.
How much you contribute depends on your own situation – how many kids you have, your own financial commitments, lifestyle and retirement plans. It’s also essential to get everything in writing to protect yourself and your child.
Buying a property together: this can seem like a good idea, but if circumstances change it can get complicated. If you do go ahead, make sure you are tenants in common, not joint tenants. And bear in mind that if you own half of the property but don’t live in it, you may be liable for capital gains tax when it’s sold. It also means you are liable for the debt if something goes wrong, and the debt will impact your own borrowing capacity.
Guaranteeing a loan: this essentially means that you will cover the loan if your child can’t pay it. If you limit your guarantee to a fixed amount, this will protect your own assets.
Again, your child needs to be realistic about what they can afford to avoid getting into too much debt.
What happens if your child can’t keep up the repayments?
This is something worth talking about in advance. They may need to sell the home, or move out and rent it to tenants until they can manage the repayments again. For this reason, it’s worth choosing a property that will appeal to tenants. A solid, two-bedroom apartment close to public transport, for example, is always going to be a safer bet than a quirky renovation project.
Thinking of buying, selling or investing?
If your circumstances are changing and you’d like to find out how much your home is worth, feel free to get in touch with us. We’re always happy to advise on the current market trends on the Northern Beaches.
