How to help your kids break into the property market

Median housing prices soared to new heights in 2015 making for an incredibly fierce market to enter into for first home or investment property buyers. Although home ownership rates in Australia are among the highest in the world, one third of Australians still do not own property [1]. Despite over 70 per cent  of young Australians aspiring to own their own home, the rate of home ownership in people aged 25-34 decreased by 21.5 per cent  between 1982 and 2011 [2].

The biggest contributing factor to the decrease in home ownership among young Australians is affordability [3], and consequently home ownership in their dream suburb is becoming a two-step process. In order to create enough wealth to purchase a home in someone’s ideal location it has become common for people to build a property investment portfolio first.

Here are my top tips for parents on how to help their kids break into the property market:

1. Using the equity in your own home as a deposit. Parents who own property already can release accrued equity by borrowing against it, using this money as a deposit for their children. A substantial deposit will significantly lessen the amount of money their kids will need to borrow and as a result decrease the amount of interest paid over the life of their loan.

2. Purchase the property yourself. If your child has not been able to save enough money for a deposit you can purchase the property in your name and have your child rent it from you at half the market rate. This will allow them to steadily save with the intention of purchasing the property in the future. Because you won’t be receiving the full rental income you’re entitled to, you will need to ensure you are financially stable to manage this until your child can purchase the property. Working out a realistic timeline for your child to save is crucial in this instance.

3. Invest and co-own the property. If you’re in a situation where you are able to make a greater financial commitment, you can sign as a joint borrower on the loan and own half the property. The downside is that if your child fails to meet their repayments you will be left with full financial responsibility.

4. Act as a guarantor on a mortgage. If you’re not able to able provide your child with a lump sum of money but you are the owner of your home or property, you can use the equity to be a guarantor to help your child qualify for a home loan. This option needs to be well thought through however, because if your child is not able to repay the debt your home might be put at risk.

5. Provide seasoned advice and support. Before you decide to provide any financial support toward your child’s property investment it’s a good idea to thoroughly educate them on sensible money habits, as well as how to budget and plan, which doesn’t come naturally to everyone. To ensure your child fully understands what is involved in purchasing a property it’s important to explain all of the basics involved and terminology used that may be unfamiliar to most first home buyers.

Being able to help your children break into the property market is a wonderful gift, whether that comes in the form of financing or empowering them with valuable advice. Either way, you should always first consult an accountant, financial planner and property lawyer to ensure you find the best way to help you kids.

[1] 2015 Australian Clearinghouse for Youth Studies – Home ownership and young Australians VOL. 1 NO. 8 JUNE 2015

[2] 2015 Australian Clearinghouse for Youth Studies – Home ownership and young Australians VOL. 1 NO. 8 JUNE 2015

[3] 2015 Australian Clearinghouse for Youth Studies – Home ownership and young Australians VOL. 1 NO. 8 JUNE 2015