How to Help your Children Beat the Next Property Price Rise
No matter what age your children are, you’ll inevitably worry about their finances and future security.
If your children are adults who have yet to achieve the ‘Great Australian Dream’, your worries may be escalating along with (the almost daily news) of real estate bubbles and surging house prices.
When you take into account the likelihood of interest rate rises in the future and home loan approval restrictions, you may think that the chances of your son or daughter being able to afford to buy their own properties are pretty grim.
It seems that your kids could be destined to rent for the rest of their lives and while it’s a viable option for many, you can’t deny that there are serious downfalls to not investing in your own home.
Renting long term is inherently insecure
Your kids never know when they have to pack up and move (again) and constant moving can get expensive.
The rent they pay can be considered ‘dead’ money, going to build a landlords wealth rather than their own.
And then there’s the lack of freedom to make changes (such as renovations) to suit their personal needs and growing families.
Thankfully, there are a few things you can do (besides buying your children their own homes yourself) that can increase the chances your offspring will be able to purchase their first home, such as:
Let them come home
If you still have the room (and some would say the patience), allowing your children to live at home to save money is a great idea. While you’ll want to give them a break from expenses so they can save some cash, you can still ask them to pay their own way with food and utilities money; however, if you can afford it, you could even ask them to pay their way by contributing to the housework!
Make them pay rent
If you do allow your children to move back home, you may be doing this so they can avoid paying rent. You can still ask them to pay a small rent amount though, as every dollar counts and paying anything less than market rent rates will help them save money quicker.
If you have the means, you could save their rent (or a portion of it) and give it back later to help with their deposit. Either way, by paying you rent (no matter how small), they will also be developing a ‘savings’ record. This savings record will help with their loan application because it will show potential lenders that your children are able to put aside money on a regular basis.
If you have equity in your own property, you can guarantee your children’s home loan. This is a big commitment because you’re liable for the loan amount and servicing the loan until it is discharged. You have no rights to the property and it may restrict your own borrowing ability. In spite of these drawbacks it is a viable way of helping your children when they are having trouble meeting the bank’s lending criteria.
Become a co-borrower
If you’re not interested in becoming a guarantor, another option is to become a co-borrower in a joint-and-several arrangement. This means you’ll have rights to the property and benefit from capital gains, but if your children default on their payments, you’ll be responsible for the entire mortgage, not just your portion.
Gift them a loan
If you do end up giving your children a deposit for their own home, don’t make it a flat-out gift; instead, make it a loan with a legally binding contract. This way, they will receive the help they need, but they’ll be forced to learn some good budgeting habits to pay you back, which will help in future endeavours. Make sure you make your contract official though, so there’s no chance for misunderstandings or of them taking advantage of your generosity.
Explore the Ultimate family Win/Win
There is a way for parents who have equity to help their children buy a home without risking the family home. It’s a new concept in joint ownership where each party owns a share in the property but each has a separate loan facility and the property secures the two loans.
An arrangement such as this reduces the risk for parents and helps secure your children’s financial future. Your offspring pay their own loan and it can be at any percentage split you like. The children scale up to full ownership over a selected term typically about 3 years.
By Ian MacLeod