This is a very real issue for those living in Sydney and Melbourne right now. With property prices reaching record high levels, it’s become a challenge for the next generation to afford a home.
More and more parents are coming to the party and assisting their adult children to get into the property market.
The Bank of Mum and Dad is now valued at $65.3b and is Australia’s fifth largest lender. Parents are helping to bridge the gap as a means to an end.
According to a recent report online, 27% of Australian parents are assisting young homeowners with their first properties, lending more than $64k per family on average (with 67% not expecting to be repaid).
Figures suggest that nearly three quarters of parents are lending cash from their own savings, but perhaps there’s a better?
Rather than using cash, it is smart to use equity from an existing property, either the family home or an investment property. There are lenders who offer this product and with the right safe guards in place, it is a viable alternative to handing over your hard earned cash.
How I helped my own daughter get into the property market
Nine years ago my daughter bought her first property, a two bedroom unit in Sydney’s northern suburbs. At the time she had less than $20k in savings. While she qualified for the first home owners grant (which was double what it is now) and zero stamp duty, it wasn’t quite enough.
Rather than give her cash, I released $59k of equity from one of my investment properties so that she would avoid paying Loan Mortgage Insurance.
The bank set up a limited liability guarantor loan, which meant that my total exposure was for that $59k.
Just 18 months later, there was enough capital growth in the property for her to refinance and I was then free of my commitments of guarantor.
Since that time my daughter has purchased two more investment properties using equity from that first purchase – a path she wouldn’t have been able to go down without my initial financial assistance.
If I had given her $59k in cash it would have taken her longer than 18 months to repay the loan and she would not have been in a position to acquire her investment properties in such a short period of time.
Having this Strategy enabled her to super charge her investment portfolio all on a $20k initial deposit.
The ins and outs of cash versus capital growth
While a set capital growth figure at the end of the day cannot be guaranteed, this is still a lot safer option to help your child than to give cash. If for whatever reason you need access to your cash at some point in the future, you then have to come up with an alternative source. This is where some families come unstuck and can find themselves caught short.
The beauty of tapping into equity at both ends is to preserve your cash and let the property grow in value over time.
My broker recently confirmed that this type of limited liability loan is still available and the guarantor’s liability is limited to 20% of the purchase price plus costs.
Protect all parties with a written agreement
An agreement needs to be set up to properly safeguard both parties before anything goes ahead, being mindful of timeframes – both yours and your children.
If there is an expectation that the money is to be repaid, have a formal understanding of when that should be.
As a guarantor, you are liable for any defaults on the loan, so make sure that your child is aware of this and put some measures in place to mitigate your risk.
I had a conversation with my daughter early to say that if it ever looked like she was going to be caught short and miss a mortgage payment, she was to let me know and we would manage it.
Be open and honest with your children about how to manage that scenario should it occur. The last thing you want is for the bank to come knocking on your door.
Parents helping their children get a foothold on the property ladder can mean all the world to them, but be wise in how you do it. Hold onto your cash and use the bank’s money for the short term. That’s the smart way to help your children.