“Should we help our children into their first home?” was the topic of a recent broadcast I did on radio 2UE.
It’s a topical question in these days of shrinking home affordability but, like most big issues, there is no simple answer.
As a general principle I feel it is better to assist your children financially sooner rather than later. After all, if you are 55 now, your kids are probably about 30, and it makes little sense to put off helping them until you are in your 90s and they are past retirement age.
But, first, you need to understand why your children are unable to buy a home right now without help. Is it because they have not been able to save a deposit, or because their income is insufficient to make the mortgage payments, or a combination of both? This is an important issue because the last thing you want to do is help your children into a situation where they become over-committed.
If they have been unable to save a deposit, is it simply because their incomes, combined with rent, make it impossible to save, or are they the type of people who are bad money managers and think nothing of spending big on a night out? If bad money management is the problem your first task should be to sit down with them, help them set some goals, and suggest you re-visit assistance when they have demonstrated a capacity to save.
But if rent is the main issue, the best way for you to help may be to invite them back home and give them a couple of years rent free, on the condition that all the money they are paying in rent be saved in a special account earmarked for a house deposit. This could easily amount to $50,000 in two years.
If their incomes are fine, but insufficient deposit is the problem, and you are satisfied that they will take a responsible attitude to borrowing, an option may be to go co-borrower. The effect of this is that your house will also be mortgaged as security for the loan. It will give them ample security and save them about $30,000 in mortgage insurance. The downside is that your assets are available to the bank if your children default on the loan and house prices plunge.
An option, if you opt for the above strategy, may be for the children to move out of the new home after living in it for a few months and spend a couple of years back with you. The house could then be rented for up to six years without capital gains tax being an issue and the rental combined with the tax concessions should enable them to pay the loan down quickly.
Unfortunately, parents often put their names on the title deed as well as their children, as an alternative to going co-borrower. That is a very bad strategy because the parents are still liable if things go wrong, and they could also face a hefty capital gains tax bill if they decide to transfer their share of the property to their children in the future.
Obviously, other options include simply giving them the deposit, provided your children are responsible money managers, but you need to keep in mind that your money may well have to last you until age 90 or beyond. It really gets down to balancing priorities. Just keep in mind the best strategy of all is to teach your children good money habits from an early age.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email:firstname.lastname@example.org