It is often said that the recent surge in property prices across Australia is making it harder for first time buyers to achieve the great Australian dream of home ownership.
In fact, current ABS data shows the number of housing loans approved nationally for first home buyers fell by just below 10 per cent over August to 6,054, the lowest monthly result in six months.
Perhaps this is why more and more Australian parents are endeavouring to do whatever they can to help their adult children to buy a home of their own.
Have you ever considered helping your child purchase their first home?
These days it’s fair to say that housing in major cities is often simply unaffordable for young adults who may still be studying, on an average wage or have just begun paying off existing debts such as university fees and so on.
If helping your children to buy their first home is something you’re seriously considering, here are some things that you need to think about before you go ahead and do so.
Know what you’re agreeing to in terms of lending money
If you do decide to lend some money to your child, it is a good idea to ensure that the agreement you have with them in terms of repayment, is set in stone.
Regardless of who you’re lending money to, it is always best to make sure you’ve got all bases covered in an effort to lower the chances of any arising conflict.
You might also like to consider where you stand in terms of charging interest on the loan – If you don’t want it to be classified as a gift, you could charge interest on the money at a rate that adheres to current federal rates. If in doubt, seek out the assistance of an expert.
Be realistic about how much money you can lend
Most parents are generous with their kids, it’s only natural. But it’s imperative for your future that you don’t lend more money than you can afford.
Do your sums and consider what will happen should you need extra money in the future. As they say, you never know what might happen, so really think about how much money you need in the bank for any unexpected events and / or to secure a comfortable retirement for yourself. It’s wise to ask yourself: how will my life be impacted if I never see this money again?
Acting as a guarantor
If lending or gifting funds to your children is not a viable option for you, you might alternatively consider acting as a guarantor on a loan. A ‘parental guarantee’ or ‘family pledge’ home loan feature would allow you to access the equity in your mortgage, which could then be used to provide additional security for a portion of your child’s loan amount. This will in turn reduce the loan to value ratio on your child’s loan and can help them to save money when it comes to paying Lender’s Mortgage Insurance.
That said, don’t forget about the basics:
- Teach your kids to save – Remind them that owning their own home will more than likely mean waving goodbye to (or at least cutting back on) bought dinners and other social outings.
- Make sure they know the lingo – There are heaps of jargon terms out there that can really throw you or your kids off. If you don’t understand certain terms enough to provide a correct explanation, encourage your kids to go to an expert like a mortgage broker who can help.
- Ask them to consider the worst case scenario – If your child can picture the worst case scenario in terms of what life may throw at them, and as a result, how their financial situation could be impacted, they’ll be one step ahead of the game and could possibly be one step closer to that goal of home ownership.
It’s only natural that you want to help your kids to acquire the Aussie dream of owning their own home. By going the right way about it, you’ll help your child to carve out a promising future, while ensuring that you can still lead a financially comfortable life and retirement.
Sarah Cannata is the Communications Manager at Help Me Choose – you can read more interesting articles by reading the Help Me Choose blog.
*The information provided in this article is intended for an Australian audience. It should not be relied upon for the purposes of entering into any legal or financial commitments.