With rents at record highs, median house prices rising and cost of living pressures, there is no doubt it is getting increasingly harder for first homebuyers to get a foothold on the property ladder.
Home ownership in Australia has steadily decreased in successive generations, with 1991, 2006 and 2021 Census data showing owning a home, including homes owned outright, or with a mortgage, has declined in each successive generation.
The 25–39 year-old Baby Boomers in 1991 were three times more likely than the 25–39 year-old Millennials in 2021 to own a home outright, the data revealed.
For many young adults, the path to realising the dream of home ownership will likely not be a reality without the help of their parents.
But for parents who want to get their children ahead and onto the property ladder, it needn’t be a case of simply handing your child a sum of money.
Financial adviser and ProSolution Private Client director Stuart Wemyss says there are simple and common ways to lend a helping hand that mean you won’t spend on a property at all.
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Property experts say there are more options beyond stumping up a some of money. Picture: Getty
“The first one is the family guarantee loan, because quite often, deposit and the ability to save a deposit and out save the market tends to be the biggest kind of impediment for kids to get into the market,” he says.
“Typically, what you’ll see is, they’ll finish uni, they’ll go and get a graduate job…they’ll get a good savings pattern, and they can afford to borrow, you know, maybe $600,000 but they might only have saved $50,000 or $70,000, which is challenging because they’re going to have to pay Lenders’ Mortgage Insurance.
They young adults are faced with a situation typically of either get into the market now with a family guarantee, or have to go away and spend another one to two years saving a larger deposit, Mr Wemyss explains.
“Meanwhile, of course, the risk is that property prices continue to increase over that time, which is likely in most states,” he adds.
A family guarantee works by the bank using a portion of equity in parents’ property as an extra ‘security’ on the home loan.
And once the house increases in value, the guarantee can be removed from the loan, hence freeing parents from any risks associated with missing a payment.
Using an investment property as a tool
New South Wales-based mortgage broker Jen Hughes says how parents help their child buy a property is a common question she receives, and everyone does it differently.
An investment property will benefit the buyer first. Picture: Getty
“Some parents are literally buying properties and renting them out so they pay for themselves,” she says. “They are only buying properties that they don’t have to tip their own income into, so they’re basically fully negatively geared,” she explains.
“They say, ‘this is my plan. I’ve got three kids, I’ve got three investment properties. Now, when one of them wants to buy a house, they can either buy this from me or they can sell it and use that as a deposit’.”
While that situation is “every parent’s dream” but completely dependent on financial circumstance, there are other avenues which can be explored in conjunction with expert guidance.
“A mortgage broker might know someone who could give them some free basic advice to get them started, like either a solicitor or an accountant, or someone that can actually look at from a legal structure and a tax structure about what’s going to be best for them optimally,” she says.
Start saving early
Ms Hughes says her best tip to parents is setting aside money for your children from the start, even while paying off your own mortgage.
“If it’s an extra $100 a week, or $200 a week, or whatever you can afford,” she says. “Then let that compound.”
Taking out a reverse mortgage
Cashing out their mortgage is something Ms Hughes has seen parents do when they want to buy their child a property without a clear money hand out.
Cashing out on a mortgage or using a reverse mortgage to pull a deposit is common. Picture: Getty
“I did have a parent who got a reverse mortgage to help with a deposit for their last child and she only needed an extra $30,000 or $40,000,” she explains. “Their plan was then to just sell their house and downsize.
“We calculated that $40,000 might cost them, $80,000 over the next four to five years but for them, it was just worth it getting into the property market.”
Co-owning the home
Opting to co-own a property with your child is also an option that sees you benefit, though Mr Wemyss warns it can be tricky and generally only worked short term.
“If you say, ‘look, I’ll co-own the property with you, we’ll do it for five years, and then you buy my 30% off me’, you’re going to trigger stamp duty and Capital Gains Tax,” he says. “That creates a bit of friction.”
Mr Wemyss adds: “I find that if you’re at two different stages of life, co-owning assets might work as a very, very short term arrangement, but typically will have a sunset period, it will have a maturity period, where it’s no longer working for the individuals.”
Good education
Teaching children good money habits from a young age will go a long way to helping them become homeowners, Mr Wemyss says.
“Firstly, when they’re younger, talking about money, teaching delayed gratification, doing those sorts of things, investing money on behalf of kids, and trying to get them involved as much as possible, and really just talking about at it home, that’s kind of where it starts.
Experts say good money habits are built from a young age. Picture: Getty
“If they see their parents making good decisions, they’re likely to do that as well and then once they start working, whether that’s when they’re at school, university, or even after university, it’s about teaching good cash flow management – that’s the critical thing.”
No one should be buying property until they can manage cash flow well, he warns.
“It’s really teaching kids on how to budget, how to quarantine discretionary and non-discretionary expenditure, paying yourself first, all these sorts of strategies that really helps cash flow management, because we don’t really get taught it at school,” he adds.
Why no cash handout?
While gifting your child money seems the easiest and obvious solution to helping them by a home, it carries risks more indirect or longer-term options do not.
A key risk to consider is if the child has a partner, Mr Wemyss says.
“We tell clients is put it as a loan, make sure it’s clear it’s a loan,” he said. “Whilst you might not ever want it to be repaid, at least then your capital’s protected,.
“If they are in a relationship, and it dissolves… at least you’ve got that asset protected.”
At the end of the day, giving your child a cash advance if possible goes a long way.
It helps with the ever increasing hurdle of a deposit, Mr Wemyss says, but also boosts borrowing capacity and serviceability perspective.
