Leg up for the Kids

Generational wealth raised its head again this week. A study released this week revealed parents are worried about high housing costs in major cities and whether their children would ever be able to buy in those cities.

The idea of helping your kids to succeed in life is strongly ingrained in Australians, and buying their first house is the acknowledged first step. So how do you help your kids? You can give them some of your money to get them a house deposit, or you can help them help themselves:

• Gift: if you have the resources, you take money out of the bank and give it to your child for the house deposit. The strings attached are up to you. If you do gift money for a house deposit, the lender will usually want a statement that the money does not have to be repaid. If borrowing above 85% of the property value, many lenders will also require some kind of savings history to be demonstrated in addition to any gifted deposit monies. If the property value rises, your child can refinance the property and perhaps make a gift to you.
• Guarantor: if you have sufficient property equity, you can ‘go guarantor’ on your child’s entire loan, these loans are sometimes referred to family guarantee loans as they are most often restricted to immediate family. This means they don’t have to save a deposit, but they get the loan based on your security and you’re on the hook for the guarantee amount only until that mortgage is discharged. If considering being a guarantor, remember that you gain no property rights from the guarantee, and it may limit your ability to borrow.
• Co-borrower: if the home loan is too much for your child to enter by themselves, you could also consider becoming a co-borrower with them. This is a joint-and-several arrangement which means if your child stops repaying the mortgage, you have to pay it all – not just your half. The benefit here is that you actually also benefit from any capital gains.
• Insurance: as a guarantor or co-borrower, you don’t want to be left with the whole debt because of death or injury to your child. Agree on life insurance policies that cover the debt.

One tip for aspiring parents who want to be in a position to gift their children with a deposit: the best opportunity to save towards this goal is before you actually have them. That means planning early.

However, not every parent thinks it’s a great idea to make a house purchase easy for their child. They’d rather prepare their kids for handling their own financial security.

Preparation of kids starts with attitude – understanding that if you curtail your week-to-week consumer spending, you can save for medium-term goals such as buying a house, and long-term goals such as retirement.

The right attitude is supported by budgeting, goal-setting, saving and prioritising; and basic education about compound interest, risk and return and the assets you borrow for.

We can’t blame our kids if they don’t know these things – it’s up to us to teach them.

 By Mark Bouris