It’s no secret, getting onto the property ladder today is harder than ever for your children and grandchildren.
According to this year’s Household, Income and Labour Dynamics in Australia (HILDA) survey, home ownership among 18 to 39-year-olds has declined rapidly since 2001, from 36 per cent down to 25 per cent in 2015. Additionally, one third of young Australians are taking more than five years to save for a deposit on their first home, according to finder.com.au.
The question is, can we help our children and grandchildren get onto the property ladder and set them up for financial prosperity without it costing your pension?
As a financial advisor, I have a number of clients wanting to give their children or grandchildren a leg up, without handing over cash or going bankrupt themselves. There are several financial and non-financial ways you can ensure your children or grandchildren are ahead of the game when it comes to property.
Teach good budgeting and savings habits
Teaching your children or grandchildren things like how to budget, set financial goals and save early can really set them up for long term gains. As they get older, having open and judgement free discussions on how interest rates work, the consequences of unsustainable debt and the benefits of an emergency fund could go a long way in stopping them developing bad habits. This will be critical in their early days of earning an income and in taking the first steps toward home ownership.
Suggest your kids look into their credit record
A tarnished credit report could affect your children’s ability to get approval on a home loan. Encourage your child to really understand their debts and how to pay them off in a timely manner. This could mean sitting down with them to develop a payment plan or simply helping them prioritise their existing debts. When helping your children with debt, it is important to not come across judgemental or treat them too much like “children”. Doing so could impact on their willingness to ask for help, and could see them in a worse financial position than they started in.
Let them live under your roof while they save
Due to factors such as the increased cost of living and housing affordability issues, nearly one in four people aged 20 to 34 receive financial support by living at home. Whilst this may be stressful for you (and most probably your child) it will have a huge impact on the amount they are able to save and may have them in their dream home sooner, rather than settling for less.
Get them up to speed with the real cost of buying property
This may involve government fees, insurance and interest charges – encourage your children or grandchildren to do some well-thought out research on the extra cost buying a home entails. You don’t need to know all the answers yourself, but steering them in the right research direction might be extremely handy.
Your children or grandchildren could also save a significant amount of money over the long term by understanding types of home loans, comparison rates and key considerations should they buy an investment property.
Help them explore government assistance options
The First Home Owner Grant is a national scheme funded by Australian states and territories. If your children or grandchildren are unsure about eligibility, contact your state revenue office. Getting some extra assistance from the government can help out your child or grandchild when they need it the most.
Loan the deposit
Lenders will generally ask for a minimum deposit of between 10% and 20% when buying a home. If you can afford it, loaning an interest free deposit can be a great start for your child’s or grandchild’s home ownership dreams. A good deposit will reduce the amount that needs to be borrowed, as well as the interest paid over the life of their loan, setting them up for a better financial future.
Bear in mind, if you happen to receive Centrelink payments, you’ll need to consider that a loan of this nature could impact your benefits.
Signing as a guarantor
Some lenders allow you to use the equity in your home as additional security for a loan taken out by your child or grandchild. It’s essentially a promise by you to the lender that they will abide by their responsibilities as a borrower. And, if they don’t or are unable to, that you will repay the loan for them.
Going guarantor requires a lot of thought because, if things don’t go to plan, the loan becomes your responsibility and you may have to sell your own home in the process to clear your child’s or grandchild’s debt. Having a transparent understanding of your child’s or grandchild’s financial position (and history) can help you make a decision which will financially suit both parties.
Going in as a joint borrower
If you sign as a joint borrower, you’re equally responsible for the home loan and must repay the entire debt with the principal borrower—your child or grandchild—whether they default or not. This option can assist your child or grandchild if they have a bad credit rating, but have proved to you they are financially mature enough to manage their mortgage repayments. This is also a big commitment and you’ll need to understand the risks and get the right advice.
If you’re going to give money to your children or grandchildren, it may be a good idea to discuss early on how and when the money will be provided, and when and if you want the money back.
Likewise, if you’re providing non-financial support, make it clear on what terms support will be provided, for instance how long your child or grandchild can stay with you while they save.
Having an agreement in place can go a long way to ensuring everyone is on the same page and you may even consider writing down what you’ve agreed to so there are ground rules in place.
Meanwhile, if the support you plan to provide will be financial, you may want to speak to your adviser so you’re aware of the risks, benefits and any tax implications.
* Anthony Jones is an authorised representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327,, AFS Licence No. 232706.
Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.