Australia’s most senior banker has admitted what many parents surely fear: that they’ll have to ‘shell out’ to help their children buy a house.
Outgoing Reserve Bank governor Glenn Stevens told the Wall Street Journal and The Australian this week that parents, especially those in Sydney, should expect to sacrifice some of their wealth.
“I think that a lot of people of my generation are actually going to find themselves, if they haven’t already, helping their children into the housing market,” Mr Stevens said, “because that may be almost the only way that their children can enter the Sydney market … and be not too far from mum and dad.
“And I suspect that will happen a lot, and that, of course, means that for people of my age, that the wealth we think we have in our house, actually, we don’t have quite as much as we thought because we’re going to have to give some of it to the next generation.”
The trend was confirmed by ME bank research earlier this year. Its May survey of 2,000 mortgage holders found that 26 per cent had received financial assistance from a family member to buy their first home, and that the average amount had increased from $27,000 to $42,000 in the last five years.
Prime Minister Malcolm Turnbull triggered outrage earlier this year when he jokingly told an ABC radio host to “shell out” for his children. “Are your kids locked out of the housing market? … Well, you should shell out for them. You should support them, a wealthy man like you.”
As many parents know, this is no joke. Giving their children a helping hand can take a big chunk out of their retirement wealth.
ME bank found that 28 per cent of those who helped a family member buy a house in the last five years hurt their retirement.
Thus, getting it right is crucial. Here’s where the experts come in.
Give advice, not money
Queensland University of Technology property economics professor Chris Eves said parents should persuade their children to lower their expectations by looking at outer suburbs, rather than giving them money.
“There are a lot of homes on the outer fringes of Melbourne, Sydney and Brisbane available for $300,000. Younger couples can afford that,” Prof Eves said.
He advised parents to sit their adult children down and say: “You’ve got a long working life ahead of you. You don’t have to live here right now.”
Parents should also instil in their children wise savings habits in early life to help them save for a deposit, rather than simply giving them money in their adult years, according to a wealth management expert.
“Get those budgeting and saving habits locked in nice and early,” BFG Financial Services managing director Suzanne Haddan said. “The children have got to start contributing and building up their wealth.”
Safest option: lend
For parents determined to help their adult children, Slater and Gordon litigation lawyer David Greene said he would advise against going guarantor because “it’s a very unsatisfactory regime” and many such agreements “invariably end up in some form of dispute”.
His preference was for parents to provide a personal loan to their child, proven in writing and backed by a second registered mortgage.
“You can do it safely provided it’s properly documented.”
To avoid the scenario of ever having to consult a litigation lawyer like himself, Mr Greene recommended that parents consult a property lawyer to draft the loan contract.
Give cash, but not too much
A loan may be the safest option, but many banks prefer cash gifts, according to BFG Financial Services expert Ms Haddan.
“Generally to help with the deposit, you would have to gift the money.”
Ms Haddan warned parents against allowing their children to borrow more as a result: “What you have to be careful of is that you’re not so benevolent with your gift that the children end up taking on more debt because of it.”
A tax expert, Deakin University’s Dr Adrian Raftery, also cautioned parents to be wary of the assets test for the age pension.
Parents can give $10,000 per financial year, up to $30,000 per five financial years, before it impacts the pension.
Co-buy, but consider tax
As noted by Mortgage Choice CEO John Flavell, many parents don’t have enough money lying around to provide a loan or gift.
Given the lawyer’s caution against guarantees, the remaining option is to co-buy.
“By purchasing a property with your child, you will boost their borrowing capacity and you could help them to avoid saving a significant home deposit and/or paying Lenders Mortgage Insurance,” Mr Flavell said.
But tax expert Dr Raftery warned that it is usually better for the property to be solely in the child’s name for tax purposes (including land and capital gains taxes), rather than owned jointly with the parent.