Author: Michelle Griffiths, Partner, TAG Financial Services
Michelle Griffiths, Partner at TAG Financial Services has spoken to many parents who want to assist their children in buying their first house. Here are her key recommendations to make this a success.
Parents want to assist their children in buying their first home for 2 main reasons:
1. Because housing is so expensive now – helping them may be the only way they can 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 how 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:
The Wrong Way
The parents tell their child 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 savings and repayment capacity) and starts to look at houses worth $730,000, as the extra deposit will allow them to borrow more.
This means 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 $295,199 of interest over the 25 year life of the loan) to $3,120 per month (paying $375,707 of interest over the 25-year life of the loan).
In this scenario, your gift has not achieved your objective. Whilst they were always going to be able to get into the market – they no longer have any “breathing space” and have less than they would have had before the “gift”.
The Right Way
The parents let their child go through the process of saving for a deposit and working out what their affordability for home loan repayments is. This means they buy a house within their financial framework. Once the child has committed to the purchase and have their loans in place, the parents then offer some additional help. This will take the edge off the home loan. It could be used to reduce the loan by say $30,000 and also paying for the curtains and new carpet they really want.
This outcome means you have a very grateful child by giving them some additional “breathing space” on the loan. It could potentially reduce the interest that they pay throughout the loan by $20,000!
Think about….
It’s worth thinking about the reason for your gift and getting some advice around how to do this so that you and your children are left in the best possible financial position.
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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). Copyright 2022. Please do not reproduce without the expressed written consent of the author.