The Rise of the "Parent Bank". Helping Kids to Buy a Property
Have you kids been trying to get on the property ladder, but missed out every time? Recent research from LJ Hooker shows an increasing trend of parents helping their kids to buy their first home with the belief they are investing into their future, helping to provide them with a roof over their heads and an asset that could pay handsome dividends.
There are many ways that this can be done and we explore some of the options here.
A leg up onto the property ladder
How to Help Your Kids Buy a Property
Activity in the residential real estate market has reached feverish heights over the last few years. The CoreLogic RP Data Housing and Market update shows that by the end of January, there were 8.7 per cent more properties being listed in the capital cities than just 12 months ago. Not to mention, the median price of houses in these regions grew by 7.5 per cent over this period.
With properties being snapped up like hotcakes in cities like Sydney and Melbourne, there's every reason to haul your children on to the property ladder as soon as possible. Values only really go up over time, and it could be better to get buying sooner rather than later.
A February 15 release by CoreLogic shows that over the past ten years, the home values of the combined capital cities grew by a staggering 72 per cent. By aiding your kids in their house hunt, you're investing into their future, helping to provide them with a roof over their heads and an asset that could pay handsome dividends.
A Few Things to Consider
Putting down a deposit
The most direct way to help your kids during their home ownership journey is to help pay for some of the initial deposit. It's certainly a route that many parents are taking as, according to research from ING Direct, 80 per cent of parents are ready to financially aid their children when buying a property.
Furthermore, the organisation's Kids Living at Home report discovered that almost half of all parents were fine with having their kids live in their home if it helped them to save for a house of their own. These people would even hold back on purchases and holiday expenses to accommodate them if necessary.
For your child's next birthday, instead of helping to fund a new a car or that holiday to Fiji, why not give him or her a cash gift to put toward that deposit.
Being a guarantor
If you're not strapped with cash yourself, another way to help your children into the residential real estate market is to position yourself as a guarantor. By putting yourself down as one during the financing process, you can access the equity built up in your own home and use it as collateral.
This will accelerate your kids' property journey as they should be able to get a lower minimum deposit for their loan. Since December in 2014, the Australian Prudential Regulation Authority (APRA) has pressured banks to tighten their lending standards. This has resulted in borrowers facing difficulty when trying to take out a high loan-to-valuation ratio mortgage. By being a guarantor, you should be able to improve their chances significantly. Furthermore, this will help them get a secured loan, which should offer a lower interest rate.
Be sure to get in touch with LJ Hooker for an appraisal to get a more current reading on the worth of your home. CoreLogic's monthly indices show that Hobart's average house value rose by 5.34 per cent in the month of January alone. In Canberra and Melbourne, this figure was just under 3 per cent - a more modest but healthy increase nonetheless. An updated valuation could just help you unlock more equity to utilise.
Still, there are risks behind this option and we do recommend speaking with your financial adviser before making any big decisions.
Are your kids wanting to buy a house and make an investment of it? The NAB Australian Residential Property Survey of 2015's third quarter shows that when it came to established homes, first home buyer investors increased their market share to 10.5 per cent. This is a 1 per cent increase over the prior quarter and shows the rise of this group of buyers.
If your kids are buying a property for investment purposes, they may look to friends or business peers to partner with and share the costs. However, these relationships aren't averse to falling apart, which could lead to some financial and logistical chaos.
As they say, blood is thicker than water, and teaming up with your children to share both the cost and returns from real estate is a great way to help your children up the property ladder. Then, when they're more financially secure, they can simply buy you out and be on their way.
Thankfully, this may not take too long. Research from LJ Hooker reveals that 40 per cent of home buyers aged 18 to 30 make more than $100,000 a year. With income like that, and your support to help lift them up the first few steps, they could have a home under their name before you know it.
Furthermore, a high income should mean that it's less likely that they'll default on their repayments, which means less risk for you if you're a guarantor.
Of course every situation is different so make sure you talk to your financial advisor or bank manager before lending any money or going as gurantor as they are best to advise you personally.