Keeping it in the Family: Why the Bank of Mum and Dad is Now Big Business
Financial security tops the list of ultimate life goals across the board. While definitions may vary, that security usually comes in the form of home ownership. Investing in property has always been a reliable strategy for building wealth, and plenty of homeowners have made a tidy profit when the time has come to sell the family home.
But for a growing number of home buyers, the first step on the property ladder feels increasingly out of reach. Getting there is now often boosted with a little bit of help from ‘the bank of mum and dad’. A recent report by Digital Finance Analytics suggests almost 60 per cent of first home buyers received help from their parents to amass the deposit. Australia’s booming property landscape means high home prices and even higher deposits. Parents are either gifting or lending on average up to $100,000 to help their children gain a foothold in the market.
With prices in capital cities spiralling beyond the reach of many, it’s tempting to dip into your savings to help your children take that first step on the property ladder. But before you start raiding the retirement fund to stump up the deposit, there are a few things to consider.
4 tips to help protect your financial interests.
1. Make any loans in writing. While it’s natural to want the best for your children—and trust that they also have your own best interests at heart—failing to register any loans in writing is a strategy laced with danger. Not only can terms be forgotten over time, but a lack of written proof can leave you out in the cold and legally liable should a child be unable to service the debt.
2. Consult a legal eagle. Both parties should seek independent legal advice from a solicitor or conveyancer before entering into any agreement. Don’t be left in the dark around what to expect in terms of repayment and the duration of the loan. This step is a legal necessity to ensure your loan is enforceable should any court action rear its ugly head.
3. Don’t forget your own financial needs. As tempting as it is to stretch the limits to help your children, don’t neglect your own needs. Most parents able to lend or gift are nearing retirement—which makes smart financial decisions even more important. Consider the funds needed for your lifestyle before you write that extra zero in your cheque book.
4. Update your will. Lump sum cash inheritance windfalls are gradually disappearing, with many Australians now preferring to watch their children flourish by enjoying the fruits of their labour. A first home deposit can help, but don’t forget to update your will. Not only will this clearly define the terms of the arrangement should anything unfortunate happen to you, it also eliminates the risk of any family conflict over finances.
Family comes first: here’s how you can help your adult children.
There’s a new bank in town. Did you know ‘the bank of mum and dad’ is now worth an estimated $35 billion to the Australian economy? This makes it the ninth-largest residential mortgage lender in the country! So it’s safe to say this is more than just a flash in the pan.
Beyond gifting and lending substantial piles of money for deposits, parents are also acting as guarantors on home loans. This move helps home buyers purchase higher-ticket properties. Increasingly, they are even using the equity in their own houses to help their kids secure their first home. It’s safe to say parents are changing the game for first-time buyers.
Serendipity and the art of timing. With the average Sydney home now costing over a million dollars, it’s easy to see why parents are coming to the rescue for their adult children. Deposits in New South Wales hovers around the $130,000 mark, making it tough to save your way there. Parents are helping kids to break into the property market now, rather than risk watching the difficulty levels climb.
Guaranteeing, gifting, and buying. If you’re eager to help your kids enter the property market, there are a range of paths you can take: from guaranteeing their home loan, to gifting a deposit, to simply buying a property in your own name. The latter comes with Capital Gains Tax (CGT) implications and should be discussed with your financial advisor first (like all major financial decisions).
When it comes to helping the apples’ of their eyes, most parents find the pros outweigh the cons. Even if the market dips, it’s unlikely to make much of a dent in Australia’s love affair with real estate. With the rental market hotter than ever and housing availability at historic lows, now is the ideal time to help your kids get on the housing ladder.
But speak to a trusted financial advisor first! From the risks associated with guaranteeing a loan, to accounting for the CGT of another property, there’s a lot at stake. Making the most of your financial situation and helping your kids get ahead is a lot simpler when you talk to the team at Prime. We’ll walk you through everything you need to know. Drop me, Angus, a line at [email protected] and let’s chat.