Home affordability is the current talk of the town. How can we assist first home buyers to enter the Property Market? The “Bank of Mum and Dad” has often been referred to as a means for first home buyers to enter the market, but how can parents practically do this? There are many things parents must take into account before they would undertake such assistance, things like can my child manage his or her money? Or have they a track record in saving and budgeting? Have they a stable job? What are the implications if they have a bad relationship or divorce? It is not a straightforward decision for parents to make . Here are 5 strategies that Mum and Dad could consider to assist their children.
Strategy 1- Lend the money
With housing prices so high the most difficult challenge for a first home buyer is to raise the 10-20% deposit plus costs to buy their first home. If Mum and Dad are lucky enough to have some spare cash they could lend that to their children on a commercial basis, alternatively Parents may have built equity in their own home and this equity is sitting in the property and not being used. They could approach the bank and unlock this equity by establishing a line of credit facility secured against the home . They could then access these funds and ON-lend the deposit for the first home to their children the amount of interest you charge your children could be the equivalent you are paying to the bank and the terms and conditions of this loan is totally dependent on you . In both circumstances there should be a Formal loan agreement drawn up between the parents and child and registered with the appropriate authorities and we would always recommend that a lawyer is engaged to assist.
Strategy 2 – Provide Guarantees
Mum and Dad may have a property or assets with a bank, they can offer these securities or guarantees to the bank limited to the amount of the deposit of the child’s new property , then the bank would lend the child the money for the property. The parents would have to provide Personal guarantees and perhaps these could be limited to the deposit. This strategy is risky in that if the child defaults on the loan the bank will come knocking on the parents door looking for recompense , so use this strategy only for the right type of child and use a lawyer to assist with the appropriate agreements .
Strategy 3 -Joint Venture
Mum and Dad may be looking to invest in Property and may decide to enter into a Joint Venture arrangement with their child whereas the parents put up the cash for a % of the property and allow the child to use the property as security for them to buy their own share. The acquisition could be done as tenants in Common setting out the % of ownership . If the child wants to acquire further interest in the property there would be stamp duty and potential capital gain tax issues. Once again there should be documentation put in place to clearly set out agreements. if the child is living in the property appropriate rental agreements should be put in place or even consider using an agent to ensure this is managed at arms length.
Strategy 4 – Encourage children to move interstate
Many property commentators have been arguing the fact that Housing is only un-affordable in the capital city of Sydney and to a lesser extent Melbourne and if the younger generation migrated interstate to more affordable areas like Perth, Brisbane , Adelaide , gold coast the prices are more affordable . Most parents want to be within reach of their children for obvious reasons , however the reality is that if they cannot afford to live in Sydney and Melbourne perhaps they should look at other states and if parents encourage that move by moral and or financial support. The strategy could be that the whole family ,Parents and children pack up and move interstate to be closer together and this may also help to resolve Mum and Dads retirement plans.
Strategy 5 – Education Earlier the better
In my view this is the most important strategy , It is not impossible to Save money , unemployment is low and the average Australian salary is quite good, however sacrifices need to be made. If Mum and Dad start teaching their children about money management early in their life this will help them manage their money and build the deposit for their first home. A lot is to do with education and mindset so encourage your children to attend seminars on money management and property , pay for their tickets and attend with them for support.
In Sydney you will need a reasonable Job and to save at least $150,000 to allow you to enter the market . Four or Five years of sacrifice , perhaps two jobs and tight budgeting should get the average Australian a deposit. I know of young people aged late teens who are working hard with numerous jobs and saving $30,000 pa , so the earlier they start the better.
This is general advice and please contact your Client manager for more specific advice for your individual situation
Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.