We’ve heard the statistics, we’ve seen the funny TV ads; we know it’s true. Our grown up children aren’t leaving home. Here are some financial strategies for parents to help their adult brood fly the coop.
Baby boomers have such fond memories of moving into rented accommodation, partying and working hard, meeting a girl/guy, getting married, buying a home and raising a family.
Unfortunately for our kids, it just doesn’t happen that way any more. Increasingly, the “buy a home” bit is getting missed out or left until the last possible moment. Many adult children are finding it easier and cheaper to live at home, but the downside is that they are missing out on the independence and enforced saving that buying their own property instils in them.
As parents, where does that leave us? Well, having adult children living at home is not all bad. There will be parents who love having their grown children around them for company and fun. But equally there are many who look forward to the day when they can reclaim the house for themselves.
The good news is that the banks are now making it much easier to help our children get their little toe in the property door. There are also ways you can help them take that first step towards owning their own home. The first thing to do is determine what sort of help you are prepared to give your children.
If you’re feeling particularly generous or are wealthy enough to afford it, you can give them cash to help with the purchase. In the past this put banks on the back foot with the red “decline” pen at the ready. If a person had been unable to save the full deposit on their own, how could they possibly be trusted to repay a mortgage?
However, this is no longer the case. Banks now realise that it is all but impossible for young people in the Sydney market to save the deposit required, even when the first home buyer benefits are tipped in. Lenders are now happy to help when a cash gift has been made by a parent.
Another way to help is to give your children access to the equity in your home to help avoid fees such as a lender’s mortgage insurance. Mortgage insurance is usually required where the borrower does not have a deposit and must borrow 100 per cent of the purchase price. If you decide to go down this path, the lender will seek a guarantee from you as the owner of the property from which equity is being sought. They will also take a mortgage over the purchase property.
Your child may earn income through avenues that are not recognised by a bank, for example, a casual second job held for a few months that may be up to 40 hours a week. In this case, because the job is casual and short term, the banks won’t assess this income stream. However, if you know your child is reliable and will work more than one job to meet mortgage repayments – then you could choose to provide an income guarantee. This guarantee means you will meet the mortgage repayment if and when your child is unable to do so.
You and your child may choose to become co-borrowers, which means you are jointly liable for the debt. This can make the difference between meeting and not meeting lender qualification guidelines when seeking a loan. You can also become co-borrowers to purchase an investment property rather than an owner occupied property. This can help your children jump on the wealth creation train, but be aware that it won’t necessarily make them move out!
Be aware also that if your child becomes a co-borrower with you, they may be ineligible to receive the First Home Buyer benefits currently available. Talk to your lender or financial planner and take their advice on this option.
Once you have decided how you are going to help your child buy a property, the next step is to set up the loan. At this stage you can choose to talk to the lender direct or consult your local mortgage broker. You may feel it is best for your child to go to the same bank and branch that you do your banking with. But that bank may not have the best product for your child’s situation, and it is not your bank’s job to highlight this to you and suggest an alternative approach. This is the key reason for asking a mortgage broker for assistance.
Although lenders such as banks are making it easier to assist children and other family members, a mortgage broker can make the whole process easier by allowing you to compare mortgages. They will also explain the loan documentation to you.
Note that not all lenders allow income guarantees or equity guarantees. Lenders also have very different fee structures when it comes to multiple security properties and guarantee documents. In these cases, a cheap interest rate may mean higher charges to get the loan set up.
Finally, always seek professional advice when considering strategies to help your adult children buy property. Emotions can run high where family is concerned, but it is important that as parents you are not financially disadvantaged by helping your children. Where any form of guarantee is involved, the lender will usually require a certificate from a solicitor to confirm you have received independent legal advice. This is prudent practice, not a barrier to a potential solution.
Rowena Bennett is the principal mortgage consultant at Warringah Home Loans. Rowena is degree qualified and has extensive experience in the finance industry. Contact Warringah Home Loans for advice on all financial matters.