Wanting your adult children to be financially independent without having to shell out a small fortune is undoubtedly every parent’s dream.
With housing in Australia becoming even more unaffordable, many boomers are being pressured to give up those overseas holidays and cruises to spend their hard-earned money on helping their son or daughter enter the housing market.
Unlike a generation ago, homes no longer cost just four times the average salary; now try more than 12 times in sydney.
Then there is the almost impossible challenge of saving for a mortgage deposit to secure a home loan while prices continue to rise, meaning many younger Australians are unable to get onto the property ladder without the help of the “Bank of Mum and Dad”.
Even someone on a six-figure salary would struggle to save for a 20 per cent mortgage deposit in less than a decade.
Property data group CoreLogic estimates that a couple earning $100,244 between them (the national median household income) would take 10 years and four months to save for a deposit on a typical Australian home valued at $770,000.
The most basic apartment is now hard to come by if you save 15 per cent of your pre-tax income, and only 17 per cent of houses in Australia are now available for less than $500,000.
Help with mortgage insurance from lenders
Those with less than a 20 per cent deposit have to pay lenders expensive mortgage insurance amounting to tens of thousands of dollars.
Wanting your adult children to be independent without having to shell out a small fortune is undoubtedly every parent’s dream (file image)
But Australian Mortgage and Finance Association chief executive Anja Pannek says parents could foot this bill for their children if it meant introducing them to the property market sooner, because prices will only rise higher the longer they wait.
“It all comes down to individual circumstances and whether you have the cash,” he tells Daily Mail Australia.
“If LMI is the differentiator, or it’s the cost of getting a mortgage, there are several different options mom and dad can consider.”
Someone buying a $500,000 property with a five per cent deposit typically has to pay $14,872 in mortgage insurance to lenders, Compare the Market calculated.
That dropped to $8,680 for someone with a 10 per cent deposit and $4,713 for someone with a 15 per cent deposit.
For a $700,000 property, a five per cent deposit generates a premium of $27,947, which falls to $15,498 for a 10 per cent deposit and $7,540 for a 15 per cent deposit.
Go guarantor
Pannek, former chief financial officer of NAB’s personal banking division, says parents could also be guarantors for a loan for their children.which may not require a real injection of cash.
This means that parents do not necessarily have to research their children’s inheritance to help them obtain a loan.
But as housing in Australia becomes even more unaffordable, many baby boomers are being pressured to give up those overseas holidays and cruises to spend their hard-earned money on helping their son or daughter enter the housing market ( (pictured is an auction in Sydney).
Australian Mortgage and Finance Association chief executive Anja Pannek said parents could pay lenders for mortgage insurance for their children if it meant taking them to the market sooner.
But parents should keep in mind that if they become guarantors, they will be responsible for mortgage payments if their child defaults on the loan.
“If something goes wrong in the future, just make sure you have your eyes wide open on both sides, and that there are very clear expectations on either side,” Ms. Pannek says.
‘If you are a guarantor, what are your obligations?’
Helen Baker, a licensed financial advisor and founder of On Your Own Two Feet, tells us that parents who become guarantors should be aware that they could lose their own home if their child can’t pay the mortgage.
“They must be careful not to put their own home at risk,” he says.
Let them live at home for longer
Baker says letting children live at home longer helps them save for a mortgage deposit sooner because they don’t spend their hard-earned money paying off someone else’s mortgage..
“It helps because instead of paying rent, putting that money away and putting it up for a deposit, they’re probably going to get there a lot faster than (if they were) paying rent somewhere else,” he says.
But it is recommended that parents charge for accommodation to cover their living expenses, especially in the case of a single divorced person hosting their child.
“The risk is that what a lot of parents do is they don’t charge them anything for a lot of other things, like food or internet, or extra water or electricity,” Ms Baker says.
“In fact, many people are sacrificing their own position to help children.”
Helen Baker, a licensed financial advisor, said parents who become guarantors should be aware that they could lose their own home if their child can’t pay the mortgage.
Buy, build with children
Parents selling in an expensive property market like Sydney might consider building a home with their adult children in a more affordable regional area or capital city.
That way, they would gain a financial benefit in case the house had to be sold later, and they would see their wealth put to work while they are still alive, rather than making their children wait for an inheritance.
“In some cases, they can afford to do it, and in some ways it’s better for many of them to give it away early because they actually see what happens rather than just leaving it in the will, which could be contested anyway,” says the Mrs. Baker. .
“So there’s an element of control in doing that.”
Australia’s 15,000 mortgage brokers are witnessing more and more borrowers needing additional assistance.
“Our members increasingly see ‘the Bank of Mom and Dad’ and parents helping young people access the mortgage lending market,” says Ms Pannek.