|Summary: Residential property prices are rising across most parts of Australia, making the home ownership dream more of a nightmare for potential first home buyers. Yet there are options available to turn the dream into a reality, and the older generations can play a role.|
|Key take-out: Through the Federal Government’s First Home Saver Scheme, individuals saving for a home can receive a government contribution and concessional tax treatment.|
|Key beneficiaries: General investors. Category: Property.|
There has been a lot of recent discussion about home affordability, often highlighting the challenges of first home buyers entering the property market.
This has led to a renewed round of discussion on the possible negative impact on house prices of negative gearing and self-managed super funds buying residential property. And the bottom line is this – interest rates are historically low. Things won’t get any easier if interest rates were to start rising.
Rather than debating the pros and cons of negative gearing, or whether self-managed super funds should be allowed to borrow to purchase property, this article sets out four relatively straight forward strategies that might be used by parents, grandparents and even great grandparents to help the ‘next generation’ into home ownership.
First Home Saver Scheme
The First Home Saver Scheme is, I think, an underrated Federal Government scheme that encourages first home buyers to accumulate a deposit over a number of years. I wrote more about these recently in First home saver accounts take off. Where I live in Brisbane the average house price is around $450,000, so a 20% deposit (which is the level of deposit that usually allows the home buyer to avoid costly mortgage insurance) will be $90,000. It is hard work for a young person or couple to save this amount of money.
The headline benefits and rules of a First Home Saver scheme include:
- Contributions are matched with a 17% Government contribution (free money from the Government!);
- Earnings on a First Home Saver Account are concessionally taxed;
- Contributions have to be made in four financial years before money can be withdrawn and put toward buying a property;
- Anyone can make contributions – meaning it is a possible way for older generations to make contributions that will be ‘leveraged’ with the help of the Government contribution to build a house deposit.
I think that the hidden benefit of these First Home Saver Accounts is that beyond building a deposit for a house, they also build the habit of spending less than earnings and saving regularly – key financial skills that some people never master.
Get a start from the tax man and a tenant
According to ABS data, one-in-four Australians between the age of 20 and 34 live at home. This is often attributed to financial pressures. However, if those people living at home are working, it might be an opportune time for them to get their first start on the property ladder.
Negative gearing is often seen as a hurdle to first-home buyers, because the tax advantages might encourage investors to pay more for properties, pushing prices up.
However, a young Australian (or couple) living with their parents or other family might use negative gearing to their advantage to make their first purchase investment. Even for property investors on an average income, if a property has negative income of $15,000, this is worth nearly $5,000 year in reduced income tax. As well as this, the rent paid by the tenant will help pay off the mortgage.
Building modest expectations
A financial planner I used to work with said the biggest hurdle that most young people faced in their journey to buying a home was unrealistic expectations. They wanted to start with a house that was of a similar quality to their parents, rather than being prepared to get on top of their first mortgage and look to trade up over time.
If first home owners are encouraged to think about more modest options, whether it be buying a little further out, a slightly smaller block or one bedroom less, they might see benefits in terms of reduced impact on their cash flow and reduced financial pressure. They can get ahead of their home loan more quickly – always a great strategy – and then look to upgrade at a later date.
Being a guarantor for a loan
One way that older generations can be asked to help out with a home loan is to act as a ‘guarantor’ for a mortgage.
Taking this step is fraught with danger, and should be carefully thought through – and professional legal and financial advice should be sought.
A starting point is to consider why a bank requires the security of a guarantor to proceed with the loan? It is the bank’s opinion that the borrower is too great a risk to lend money to without further security. This is something that should give cause for careful thought – banks are in the game of lending money, and if they have concerns you should think carefully.
Taking on the role of guaranteeing a loan exposes you to the full risk of a loan – and if parents, grandparents or other family members take on this role it is often at the time of life that they are least suited to managing a mortgage, perhaps as they are getting closer to retirement.
I would strongly encourage anyone asked to play the role of guaranteeing a loan to seek careful and independent financial and legal advice. I think that making contributions that helps build a house deposit, perhaps through a First Home Saver Account, exposes them to far less risk while still making an important contribution.
It is not an exaggeration to say that the lot of a first home buyer is tough at the moment. The average income, as measured by AWOTE (Average Weekly Ordinary Time Earnings) is $72,500 a year. If house prices were around their long-term average of 4 times average earnings, they would be around $300,000 – which they clearly aren’t!
This makes it tough for first home buyers – and older generations can help them into home ownership by making use of the First Home Saver Schemes, looking at the possibility of helping set up an investment property while they are still living at home, and pointing out the cash flow benefits of making a more modest initial purchase. And extreme caution should be shown before taking any role guaranteeing or providing security for any loan.
Scott Francis is a personal finance commentator, and previously worked as an independent financial advisor.