“How Can We Help Our Kids Buy A Home?”
“My husband and I are in our early 60s and have just paid off our home, which we bought 25 years ago when housing prices were significantly lower. I despair that our children will ever be able to afford to buy a home. What options do we have to help them? We are both planning to retire in the next five years.
Jane, Malvern, Vic
As a parent, I know how it feels to want to help your kids financially. I feel the same emotional pull but you have to step back and make rational decisions, which is why I caution you to proceed with care.
You have several competing objectives: you need to look after your own financial wellbeing, you want to make smart financial decisions and you want your children to be financially fit.
I can’t emphasise enough that you need to look after your own financial wellbeing. As the airlines say, put on your own oxygen mask first. It’s not sustainable to help your children if that ultimately means that later, you need to turn around ask them to help you. Given that you are retiring soon, you need to do the numbers to ensure that you have enough money for your own financial security and independence for the rest of your lives.
As parents, we should also avoid assuming that our children share our attitudes towards home ownership. Research shows that Gen Y no longer sees property as the be-all and end-all when it comes to building wealth and financial security. We had one client help his daughter buy an apartment but six months later, she moved overseas for work and is unlikely to return any time soon. The apartment has become a hassle to manage (mostly falling on her dad’s shoulders) and has proved costly to maintain.
I challenge the assumption that buying property is the best way to improve our children’s financial wellbeing. In fact, buying could leave them financially worse off than renting and use up funds that could be invested in other types of assets.
Research from accounting firm EY found that over a 10-year period, renters could often be better off than buyers, even accounting for the significant increase in capital city home prices in the past 20 years. So if you do plan to help your kids with a financial kickstart, remember that it doesn’t have to involve buying a home.
If you can and do wish to assist your children financially, here is my preferred approach. Don’t hand over money as a gift; make it a loan. I call it the “family bank”. You can structure a loan, choosing more favourable terms than the bank’s if you wish, and your child can pay you interest – and potentially some principal – along the way.
This can be particularly helpful if your child is in a relationship. In the event of a split, a gift can become part of your child’s joint assets and half may be given to the ex. When money is provided as a loan, you can ask for it to be repaid, so your money is protected.
It’s a good idea to seek professional guidance from an advisor or accountant, and consult with a lawyer about drawing up a loan agreement.
Kate McCallum is a financial advisor and author of The Joy of Money. Email your money questions to hello@tonicmag.com.au
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