Wed, 23 Jan, 2019
Should you help your adult children buy a property?
Do you have questions about how to help your children get into the property market? Here’s how!
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The reality is many of us will need to help their kids get into the property market. Without that help, the maths doesn’t work and many of them just may not be able to do it. It’s as simple as that.
This is largely a tale of three immigrant cities - Sydney, Melbourne and Brisbane - that now have average prices that are outside the reach of a younger generation (although Brisbane remains the most affordable).
THEN AND NOW
Let’s look at 1975 - a good year to focus on because Baby Boomers were just turning 30, getting married, having kids and buying homes. On average they were marrying about six years earlier than they are today.
- The average price of a house in Sydney was $34,000.
- The average price for a unit in Sydney was $26,000.
- The average income was about $8,000.
So, the house to income multiple was in the low fours - roughly four years’ income paid for a house, and less for an apartment.
- Today the average house price in Sydney is $1m.
- With average income at about $75,000.
So the multiple is in the low 13s (even with two incomes you do not get back to the maths of the 1970s).
Put simply, the maths has changed so much that without some help, younger generations will not be able to step onto the inflationary elevator that is Australian property.
In 1974, just as a large wave of Baby Boomers was entering university, university fees were abolished. And then in 1989, just as the last Baby Boomers were leaving university, the fees were reintroduced again. So today’s university student can easily leave university with a $30,000 debt (or much more) compared to the unencumbered Baby Boomer.
This is relevant to the discussion of entering the property market as these debts have a material impact of someone’s ability to get and service a loan. Having to pay 4-8% of your gross income with after tax dollars materially affects borrowing capacity and cashflow, and delays the entry into the property market. It now takes on average about eight years to pay off a university debt!
So that’s the back story, and now on to the question of what older, wealthier parents who can afford it and want to can do to help their kids get into the property market.
JUST GIVE THEM THE MONEY
Let’s not beat around the bush. If you want to help them and you have the means to do so, just give them the money. Call it what you want, a gift or early inheritance, but the bottom line is that it was your money and you made it theirs. Saving enough money for a deposit nowadays borders on the impossible.
After tax, living expenses, rent and the university debt, there is not much left to save for a deposit that can easily reach $100,000. By the time they have been able to save the deposit, many years later, property prices have risen again and they never get to latch on.
If we put family relationships and politics aside, it really is a question of maths. Can you give them enough money to help them into the market without affecting your lifestyle? Even better, are you happy to have your lifestyle affected a little bit to help them in?
Ask yourself The 5% Question.
THE 5% QUESTION
Would giving them 5% of your net worth affect your lifestyle today? If your net worth was $3m, would giving then $150,000 affect you and if so how much? If your net worth was $2m, would $100,000 affect you and so on.
Or, you might say, that a large part of your net worth is in your home, so then you could ask the question a different way. Would giving 5% of your retirement fund affect you?
So let’s say that between your super and an investment property you have $1.5m. Would giving them $75,000 (or possibly less than one year’s returns) affect you in a major way?
Whatever the amount or percentage is, what you are really asking yourself is whether you can do without that money in order to help a child into the property market.
One client comes to mind, who retired last year, with a net worth of about $4m. He gave his 28-year-old son $200,000 to help him and his wife buy an apartment near the city for about $800,000. It hasn’t affected his retirement income in any material way and he is deeply satisfied with the fact he was able to get his son into the market. Now, had he had five kids, his ability to help to that degree would have changed, but you have to work with the hand you are dealt.
I often hear concerns from parents around the loss of family wealth in the event of an adult child divorcing. It’s a legitimate concern but one that has solutions if you get the right advice.
Lets look at this subject in more depth. If you are 60 and your daughter is 35, helping her now with a small portion of your wealth could make a profound difference to her and a minor difference to you. However, if you go down the more traditional road of inheritance and give it all to her at your death, she could be waiting another 30 years. By the time she inherits the funds at 65, it won’t have the same impact on her life because she has lived most of it already.
The whole idea of early inheritance is giving the funds when it really matters.
LEND THEM THE MONEY
Alternatively you can lend them the money. This can take a variety of shapes and forms:
- These can be interest free loans, as they often are.
- They can be an informal handshake agreement or they can be formalised with a written agreement.
- They can have an indefinite repayment term, which makes it a gift by another name, or an agreed repayment timeline.
- The agreement can be directly between you and your child or you can include a third party between you to formalise the arrangement.
If you lend them the money on an interest free basis, you are in effect ‘gifting’ them the interest on the money.
If you have the funds and your son has a mortgage, you could get them to set up an offset account so that you could simply ‘park’ your money in their offset account and save them the interest on that part of the loan. The only cost to you would be the ‘opportunity cost’ of earning a return on that money in your own bank account.
If you had the money in your bank account you might earn 2% on which you would pay tax, but in your daughters offset account, it would save her 5% on her debt, after tax.
You could choose to pay for their university education so that they leave university unencumbered. Or if they have a HECS-Help loan, you could choose to pay it off for them, which at the very least will help with any loan applications that they make. It will increase their borrowing capacity and increase their ability to cash-flow any loans.
For example, if they are paying 6% of the gross income towards their student loan that could easily reduce their borrowing capacity by 20%.
Making any or a combination of these ideas work for you, requires customisation to your individual circumstances. There will be tax, legal and liability considerations for many of them and you would be well advised to first canvass the viability of an idea with a financial adviser. They are best suited to navigate you through the varied and interconnected areas of expertise that are required to solve this type of problem.
Watch out for our follow up article on other ways you can help support you adult children when trying to get into the property market without directly giving them the funds to do it.
What do you think about helping adult children into the property market? Join the conversation below.
Written by Frank Paul. Republished with permission of Wyza.com.au.