Should you help the kids buy a home? - JULY 2018
Should you help the kids buy a home?
Being financially comfortable is an enviable but can be an awkward dilemma.
When it comes to your children getting a foot on the property ladder, do you opt for tough love or easy money?
It's an uncomfortable conundrum – particularly in high-price markets like Sydney. You want independent, resilient kids capable of making their own way financially, but if you don’t help they could be in for years of hard work and disappointment as the market passes them by. Alternatively, you could give them a hand and hope it provides momentum for them to steam toward financial independence.
The predicament is compounded by the fact that kids and their innate fiscal abilities are different. Ask any parent with multiple offspring and they’ll confirm, some are ‘savers’ while the others are ‘spenders’
Here’s what I think about helping children buy property.
As with any major financial decision, you must conduct due diligence. Consider all the ramifications of helping your children – and their partners – buy a house.
Remember those three words – "and their partners". It may sound harsh but when you help your kids get a house, remember they're not strictly kids. They're young adults and if they have a partner, that individual becomes part of a deal that often runs for up to 30 years. Providing a cash incentive or providing a loan guarantee carries liabilities. You will be responsible to the lender and if, say, your son-in-law display all the signs of a potential bankrupt, you don’t want to be the one on the hook for his debt.
If you want to help your kids, you need to make sure you're not risking your own future too. That doesn't help anyone. After all, in Sydney an average first home costs around $800,000, which means a 10 per cent deposit will see you up for $80,000 in parental assistance.
Even in the best circumstances, where you don’t have any issues with your kids or their partners, you could still risk being tied to a mortgage that prevents you from buying another home, renovating your current home or getting other finance.
Okay, so those are the downsides, but there are advantages to giving the kids a leg up.
Most notably is the growth in the property's value combined with lessons in enforced saving that comes from home ownership. It’s also a comfort knowing their money is going toward paying down their own mortgage rather than as rent to help pay down someone else’s.
And when it comes to real estate with the right fundamentals in a strong market, helping them get in early has a huge upside. By assisting them into their first home now instead of having them wait another three years, they gain the advantage of up to $100,000 in growth even on modest projections in most property cycles.
It could also be argued that by helping them you are, in fact, facilitating their independence, as the responsibilities attached to home ownership are far reaching. You're getting them out of the security of the family home, which means you have a chance to downsize too.
Another reason for helping the kids is they can avoid the ‘dead money’ attached to lenders mortgage insurance (LMI) because you can boost their deposit beyond the banks loan-to-value ratio threshold. LMI could be as much as $30,000 on a Sydney first home purchased on a 5 per cent deposit.
What are the options
There are a range of alternatives available for assisting your children.
Limited Security Guarantee (LSG) is becoming increasingly popular. It's when a parent or relative uses the equity in their home to help bring the deposit up to 20 per cent and thereby get the kids into a new home without LMI.
Like all such moves, it comes with risks and needs to be fully discussed with a financial expert. It should never be left to a discussion over the kitchen table because you and your children are not experts in housing financing.
The primary risk with an LSG is if the kids default on the mortgage, the lender will sell the property to discharge the balance and come after you for any surplus. That could easily go into the tens of thousands of dollars at a time when you will likely to be thinking about downsizing or retirement.
Another way is to give your children an early inheritance - which could be some or all of what you are leaving them in your will. The advantages are many-fold:
- You help your children get into a home earlier
- Your "inheritance" could greatly reduce mortgage repayments
- You help them avoid financial strain at a time when they may be starting a family or on a wage that will increase later
- You actually get to enjoy seeing how much good their "inheritance" is doing.
The takeaway is that being in a position to help your kids buy a home is great, but you must be across all the facts. Don’t make any move to assist without first consulting experts in the field such as a mortgage broker and a solicitor.
When it comes time for them to buy, a buyers’ agent will also help them locate and negotiate on a suitable home that will fit both their financial limits and lifestyle wants.