Helping your children buy property? Don’t leave yourself short

When Malcolm Turnbull casually suggested ABC Radio’s Jon Faine chip in to help his children into the property market, he was derided for being out of touch.

No doubt many older Australians are flat out saving for their own financial wellbeing, with no capacity or desire to shell out for their children’s property aspirations.

Yet there are three reasons why the conversation about this issue is bound to get louder.

First, the Australian Bureau of Statistics informed us last week that the Wage Price Index rose just 0.4 per cent in the March quarter and 2.1 per cent over the past 12 months. This means average wages are now rising at their slowest rate since the late 1990s.

Second, CoreLogic research indicates that average capital city house prices advanced by 3.3 per cent over the first four months of 2016. At an annualised rate of nearly 10 per cent, house price growth may be slowing compared to the boom years of 2013-15, but relative to anaemic wages growth, residential property prices are charging ahead.

And for first homebuyers, that’s the problem – stagnant incomes and stubbornly high property prices in most capitals make affordability a nightmare. Even in an environment of record low interest rates, loans issued to first home buyers as a proportion of all owner-occupied lending fell to 14.2 per cent in the March quarter, and first home buyers haven’t been such a small proportion of all borrowers since 2004.

Third, substantial housing market growth in recent years has seen the household wealth of Australians aged 65-74 forge ahead while the wealth of those aged 25-34 has gone backwards. Grattan Institute’s The Wealth of Generations report points out that older Australians share disproportionately in capital gains delivered by booming property prices, while younger Australians tend to share less of the windfall due to lower and falling rates of home ownership.

So these are tough times for aspiring first homebuyers and conditions are unlikely to improve any time soon. There are no quick or easy solutions and election promises from either side of politics suggesting otherwise should be taken with a grain of salt.

As ever, goal-setting, patience, and disciplined savings habits will go a long way to (eventually) making the Great Australian Dream a reality for younger Australians.

If you are contemplating helping your child fast-track their property dream, it is important to go into the transaction with your eyes open.

It is a natural instinct to want to provide opportunities for our children, but it pays to be mindful of the complexities that arise with any decision that is emotional and financial in nature.

Start by considering all the direct and indirect ways you can contribute.  Direct financial assistance includes gifts, loans, and co-borrowing arrangements while indirect support includes loan guarantees, provision of free board, caring for grandchildren to reduce childcare costs, and financial literacy education to improve cash flow management and savings skills. Chances are you are already providing support in various ways.

Whether you assist directly with a few thousand dollars or substantially more, the key is to understand the trade-offs that are relevant to your situation and the short and long term implications of helping out.

By thinking through the below and obtaining advice where required you can ensure you do not enter lightly into any financial transactions with family members:

• Consider the most appropriate mechanism to provide your support. Depending on your circumstances and what you are aiming to achieve you may choose to provide assistance through a gift, a loan, a co-borrowing contract or a loan guarantee. Speak to a bank or mortgage broker with expertise in these lending arrangements.
• Investigate the consequences for your Centrelink entitlements where you loan or gift funds to a family member. Centrelink generally counts gifts above $10,000 pa (up to $30,000 over a rolling five-year period) as assets for a period of five years from the date of the gift. Loans to family members also count as financial assets and are therefore subject to deeming rules. A large reduction in your Age Pension entitlement could be a costly (and unexpected) side-effect of lending your child funds towards their first home. Even if you do not qualify for any Age Pension entitlements today, this could change down the track and decisions you make now can affect your potential entitlements for years to come.
• Understand the possible impact of any assistance provided on the longevity of your retirement savings. The challenge is to balance the natural emotional impulse to help your children today, with sufficient regard for your likely financial position tomorrow. The last thing you want to do is provide financial assistance to a family member only to leave yourself short later in life. Insights into the possible trajectory of your assets and income (before and after helping out your children) are critical in a low-return environment.
• Manage the risks to protect against unintended consequences down the track. For example where you loan funds to a family member and their partner, it is prudent to ensure legal safeguards are in place. It is preferable to engage a solicitor to draw up a loan contract stipulating what happens in the event of relationship breakdown and what other events may trigger repayment of the loan. Financial transactions between family members are fraught with danger and the probability of family conflict is high where attention to detail is lacking.
• Plan your estate and consider any equalisation measures you may wish to introduce to ensure common outcomes amongst your beneficiaries.

Above all, you need to understand the risks and ensure any assistance you choose to provide leaves you with enough capital to support your ongoing income needs before and during retirement.

By taking a considered approach to any financial support you choose to provide, you can help your children realise their property dream without creating your own retirement nightmare.

David Kennedy is Director of Hillross Pacific Advisory, a Sydney-based retirement planning firm. He recently received the Hillross Adviser of the Year Award.