Michelle Griffiths, Partner at TAG Financial Services has spoken to many parents who want to assist their children buying their first house. Michelle outlines the key elements that will make this a success.
Parents want to assist their children buying their first home for 2 main reasons:
1. Because housing is so expensive now – helping them may be the only way they can actually break into the housing market; and/or
2. They want to make sure they are not overcommitted and have a little bit of “breathing space” when they first buy their home, so they are not living from week to week because they have borrowed too much.
I have found that the WAY in which parents offer assistance is a KEY part of whether it is a successful strategy. Here’s my suggestion of the wrong way and the right way to go about this:
Parent tells the child in advance (when they are house hunting) that they will contribute $50k to the purchase of their first home. The child then goes from looking at houses that they could afford of around $550,000 (based on their own savings and repayment capacity) and starts looking at houses worth $730,000 – because the extra deposit will allow them to borrow more. However the child is now in debt to the tune of $560k rather than the $440k that they were first shopping for – meaning that their monthly mortgage payments are going from $2,451 per month (paying total interest over the 25 years of the loan of $295,199) to $3,120 per month (paying total interest over the 25 years of the loan of $375,707). This gift has not achieved your objective – as whilst they were always going to be able to get into the market – they no longer have any additional “breathing space” and in fact they have LESS than what they would have had before the “gift”.
Parent lets the child go through their process of saving for a deposit and working out what their affordability for their home loan repayments are and therefore buy a house within their financial framework. Once the child has committed to the purchase and have their loans in place, the parent then comes in to offer some additional help – which can be used to take the edge off the home loan… this may be in the form of being able to reduce the home loan by say $30,000 but also paying for the curtains and new carpet that they really want. This means you have a very grateful child and also given them some additional breathing space on the loan – you potentially reduce the interest that they pay over the course of the loan by $20,000!
So have a really hard think about what the REASON for your gift and then get some advice around HOW you can do this in the best way so that you and your children are left in the best possible financial position.
If you have any questions, please don’t hesitate to contact me
Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686).