Topic 5: You can help your kids on to the property ladder, with or without cash
Parents naturally want to help their children, even when those ‘kids’ are well in to adulthood.
So, when parents see their adult children struggling to get a foothold in Australia’s red-hot property market, many of them lend a hand – so much so, that the so-called Bank of Mum and Dad is now the country’s fifth-largest lender.
Amazingly, more than one million parents have lent their children just over $65 billion in total so far to buy a home, with the average loan sitting at about $64,000. *
Just as many parents would no doubt like to help their adult kids, but lack the money to do so.
But there are several ways older Aussies can assist their kids in buying a home, some of which don’t require a large amount of ready cash, or indeed any cash at all.
Here’s how you can come to the rescue of the wannabe homeowners in your family, whether you’re feeling flush or counting your pennies.
Gift a home deposit
Giving your grown-up child the money for a home deposit gives them an amazing head-start to property ownership, because it reduces the amount they must borrow and thus the amount of interest they’ll pay over the life of the loan.
It’s important to be aware, though, that gifting money may impact your eligibility for the Age Pension.
Centrelink allows you to gift a maximum of $10,000 per financial year or a total of $30,000 over five financial years without affecting your pension. These sums apply to both singles and couples.
More information on gifting limits is available from the Department of Human Services.
Club together on a purchase
If your offspring’s ability to save a decent deposit on their own is limited, you could consider purchasing a property in which you both own a stake with a joint loan. Perhaps you could contribute the deposit, while your child takes responsibility for the mortgage repayments.
Some parents do this with a view to their child buying them out when they’re in a better position to save, or to selling the property in the future and sharing the proceeds, thus creating a deposit for the child to use for their next home purchase.
Most banks will facilitate joint borrowing by people who are family or friends, and one upside is that a healthy deposit means the loan won’t be subject to lender’s mortgage insurance, which is usually mandatory on loans of more than 80 per cent of the property’s purchase price.
The other big positive is that buyers who combine their funds may be able to purchase a better property, or in a more desirable area, than one who buys alone.
The downside, however, is that if your adult child or another purchase-partner defaults on repayments, you remain equally responsible for servicing the loan.
Go guarantor on a loan
Guarantor products are increasingly popular because they allow parents to use the equity in their own home to ‘guarantee’ their grown-up child’s loan.
Being a guarantor is effectively a promise to the bank that if your child is unable to honour their repayments, you will cover them, and putting up a portion of the value of your home as security.
That ‘security’ is treated as an addition to the deposit, which again can avert the additional cost of lender’s mortgage insurance. A bigger deposit also increases the maximum amount that can be borrowed.
“One of upsides of choosing a guarantor loan is that, as guarantor, you have control over how much equity you want to offer,” Ross Miller, General Manager, St.George Retail says.
Banks will often also have their own limit – for example, St. George Bank caps the value of the guarantee at 50 per cent of the homeowner’s total home equity, and makes the guarantee subject to the usual credit criteria that are applied to all home loans.
Seek government assistance
Helping your son or daughter explore the financial assistance available from the government for first-home buyers could be the little boost they need to get on to the ownership ladder.
First home-owner grants differ from state to state and are subject to change each year, with eligibility restricted to certain types of homes, up to a specific value.
For example, the Australian Capital Territory currently offers $7,000 to new buyers who purchase a new or substantially renovated home, while Queensland offers up to $20,000 for the same kind of purchase, and New South Wales gives exemptions or concessions on transfer duty.
You can find more information at the federal government’s First Home Owner Grant site.
Help them fix their record
A credit rating or credit score is used by banks to determine whether someone is a ‘good risk’ as a borrower, so a bad credit record can make it much more expensive, and even impossible, to obtain a home loan.
If a bad credit record is standing in your adult child’s way of borrowing, setting it straight can set them on the path to purchasing their home independent of you.
There are several companies called ‘credit reporting bodies’ that provide credit reports at no cost under certain circumstances. The Office of the Australian Information Commissioner provides these companies’ details, as well as more information on the credit reporting process.
If the credit report contains details that you believe are incorrect, you can apply to have it changed.
The Australian Securities and Investment Commission’s Moneysmart site has detailed advice on how to do so, but in short, it may require several steps, including contacting the credit reporting body, the original credit provider, and one of the ombudsman services.
Many companies offer to repair bad credit ratings for a fee, but it’s possible to do the same work yourself. The first step is to seek expert advice – the National Debt Helpline offers a free financial counselling service – then negotiate repayment options with your creditors.
Moneysmart offers excellent advice on managing debts, with links to plenty of no-cost resources.
Move in together
“Our survey found that three-quarters of Aussie parents felt that being able to help their kids on their home ownership journey was important to them,” Ross Miller notes.
“It also found that parents were more likely to assist their children through non-financial means, rather than by helping to pay for a home loan.”
Allowing your adult child to stay in your home could be just the relief from private-market rental costs they need to be able to save a deposit.
A recent survey by St. George Bank found that 42 per cent of parents who were keen to help their adult child buy a home did so by allowing them to live under their roof.
Of course, this solution is reliant on the family having a relationship that’s strong enough to withstand the inevitable stresses of living in close quarters for an extended period.
Centrelink generally exempts board or lodging payments received from family members from its income test, though, when calculating eligibility for the Age Pension.
More information on assessable income is available from the Department of Human Services.
If it’s not practical to have your child move in, you could consider assisting in other ways, such as providing childcare, to free up money for saving, or sharing regular meals or other household purchases to cut your child’s expenses.
Set a great example
Parents who live within their means and stick to savings goals are the biggest long-term assistance a young, would-be homeowner can have, because they lead by example.
Introducing children to budgeting early in life will help ensure that they’re able to save a deposit for a home more easily as an adult.
But if your adult children struggle with savings concepts, it’s not too late to assist – introduce them to a good savings account by searching for unbiased online comparisons of interest rates.
Likewise, using practical examples to demonstrate just how much can be put aside in a relatively short time with the right behaviour, may make a conversation about budgeting easier.
Do you think it’s right to help adult children buy a home? Or should they be taught from an early age to stand on their own two feet?