I read with interest a recent article published by the Eureka Report that provides some insight to the all too familiar dilemma that the current first home buyer will face when it comes to stepping on to the property ladder for the first time.
In a nutshell, affordability for young Australians looking to buy property has meant that in many instances they will naturally turn to parents for assistance of one kind or another particularly considering the dramatic rises in property values which have outstripped the relative growth of wages by those looking to purchase property.
The referenced article entitled “How to help your kids buy a house” provides a number of alternative approaches that can be considered by parents (often retirees or soon to be) to assist their children but at the same time protect their own interests when it comes to achieving divergent objectives.
When it comes to potential solutions these are generally solved with either debt or equity based solutions. Each individual’s circumstances will be different, but ultimately there are several key take outs to consider which include, ensuring all of the parties are clear on the proposed structure of any arrangement where parents provide assistance; a focus on arrangements that encourage the prompt repayment of any borrowings; clearly documented loan arrangements are also recommended where relevant between parents and children.
As always those looking for a solution in this area are well advised to seek appropriate advice to tailor a structure that works for all.
A synopsis of the mains points of the article that were of specific interest are as follows :
- Prepare for the worst – whatever method parents choose to assist their children to buy a home, there should always be a loan agreement drawn up between the parents and the child to protect the family in the case of a relationship breakdown.
- Consider a family equity guarantee – rather than parent’s borrowing money, an alternative option would be for the children to receive the title deeds to their parents’ home with two loans, one for 20% secured over the value of the original home and the other for 80% of the value of the new residence. The theory behind this is the child pays principal and interest on the smaller loan and interest only on the larger loan amount. Once the smaller loan is repaid the title deed reverts back to the parents and the remaining debt then switches to principal and interest.
- Declare your intentions – be transparent with lending institutions. Banks need to understand the intention of any funds advanced by parents to their children for the purpose of purchasing a home i.e. is it a loan or is it a gift.
- Look towards retirement – parents should be aware of their own circumstances before lending money to their children to buy their first home, especially if they are considering borrowing money against their own home to help out the kids. Lending institutions may be wary about lending money to older Australians that are near retirement.
- Be mindful of family relationships – If there are multiple siblings in a family unit, often lending money to one means having to lend money to another in the interests of being fair and equitable. In instances like this, the emphasis should be on the lower risk options for the parents and a focus on arrangements based on equity rather than debt or using products designed to encourage prompt repayment, such as family equity guarantees.
The information in this document is of a general nature only. Before you make an investment decision you should assess for yourself or obtain professional advice on whether the information is appropriate for your particular investment objectives, financial situation and particular needs.