Sure climbing a ladder is child’s play, but actually getting your foot onto the bottom of the property ladder when you’re young is proving to be a little trickier. This is why many Baby Boomers and Gen-Xers are considering how they can help their now adult children get into the property market without having to get a second job.
Many Baby Boomers bought a home in a time when anyone who was earning a good wage could afford to buy. However, times have changed. The new generation of homebuyers are finding it difficult to break into the market.
According to a recent survey, one in three retires in Sydney, Melbourne and Perth, and one in five in Brisbane and Adelaide are helping their adult children financially so that they could buy a home.
Many retirees feel it is difficult for young people to save for a deposit, and for many, the median home price is too high. In some city locations mortgages can be around $1,000 a week. This makes buying a home unaffordable, or worse still, risky if interest rates rise.
Many Baby Boomers paid no-more than $30,000 for an inner city property when they were in their 20s. Now the medians for homes located in an inner city area of Sydney or Melbourne are typically more than $1 million.
What makes home buying for the younger generation even harder is wage growth has not kept pace with rising home prices. 40-years-ago 10 to 15% of the median family income was needed to meet average loan repayments. Today, 30% is needed.
There are a number of ways that a parent can help their child to buy a home. These are as follows
1. The child can live at home for longer – By providing cheap accommodation, your child can put the majority of the money they’re earning into saving for a home. For instance, let’s say your child is earning $600 a week after tax. If you charge them $100 week for board, which covers all of their living expenses, then they should be able to save around half of their income per week, possibly more. Over a year of saving $300 a week this will mean that your child has saved $15,600 towards a home deposit.
2. Buy property as an investment – Some parents are electing to buy property in favourable locations as an investment for themselves, and then having their children rent the property from them. The rent paid covers the mortgage and other costs, and when the parents pass away each of the children will inherit the property they’re currently living in. But, if you’re considering this option then it’s important for you to consider the costs and legal implications, such as council fees, land tax and what happens when only one parent passes away or gets dementia. Therefore, it is advisable that if you’re going to opt for this option that you consult a lawyer before you buy a property.
3. Gift Cash – A popular way many parents help their children is to give them a lump sum that covers their home deposit. Some parents will use their superannuation or other savings to pay for this. The only problem with this is if the parents need the funds back, at a later date, then it’s difficult for them to retrieve. Therefore, it’s important that legal documents are drawn-up that cover such situations. This way parents can recover funds when they are needed.
4. Offer your child a personal loan – Property lawyer’s believe that providing your child with a personal loan is a far better option than gifting them money. The loan term simply expires when you pass away. Of course, as with other methods of help, it’s important that you seek legal representation before you enter into any agreement, and that all factors are considered, such as relationship breakdown, divorce and illness.
5. Go guarantor – You can also help your child by guaranteeing part of the loan amount. This can be done by using the equity in property and other assets to cover the loan. This will help your child increase their borrowing capacity, and will reduce the likelihood that they’ll have to pay Lenders Mortgage Insurance. If you elect to use this option, just remember that by going guarantor you will reduce your borrowing capacity and that you may also become responsible for a portion of your child’s mortgage if they default on payment.
Are you thinking of buying a home? Then contact eChoice and find the right home loan for YOU today.