31 Mar Helping your Children Step onto the Property Ladder
How can you help your children enter the property market?
Low interest rates, high rental occupancy and government stimulus have all helped in fuelling the property market. ANZ has just released forecasts suggesting that property prices across the capital cities could rise as much as 17% this calendar year.
So, can do you help your children, whilst also protecting yourself?
The first thing you should do is educate your child with a course in financial literacy. Understanding the size of the deposit required, what mortgage insurance is and how interest and principal payments work is one thing. However, key to creating financial independence for your children is also teaching them about budgeting, living within their means, lifestyle creep as their earnings grow and investing. Providing your children a sound base of financial literacy is the best start for long term wealth accumulation and financial independence from you. As financial planners, we fill this role for many of our clients.
Helping with the deposit
There are two main scenarios of how you can assist your children with a deposit. These are often referred to as the bank of Mum and Dad.
The first is gifting the deposit to your child. It’s simple, it assists and there is no tax consequences for anyone. However, the draw back here is that there is a high divorce rate in Australia. According to the Australian Bureau of Statistics there were 113,815 marriages and 49,116 divorces in 2019. You may not want the half of the couple that isn’t your child retaining the benefit of your gift after a breakup.
The second way to assist is with a loan. You may not have an intention of recalling the debt, but you have an option. If you are going to go down this road, do it properly and have the loan documented. Charging interest and setting up a repayment structure may impede your child taking out bank debt. A way around this is to provide an interest-free loan repayable on the sale of the property. You can then decide at that point whether you wish to roll it over to the next property, recall the debt, or gift the funds.
Helping your children buy their first property can be very rewarding. You’re setting them on their path to both independence and financial independence. Make sure education is part of the deal and you’ll never look back.