Smarter ways to play 'Bank of Mum and Dad' this Christmas
Due in part to tighter banking regulations imposed earlier this year, the number of adult kids hitting up their parents to help buy their first home, has dropped significantly along with the average amount on offer. Research by Digital Finance Analytics (DFA) estimated that at its peak in 2017, a whopping 60 percent of first home buyers received help from parents - average amount between $88,000 and $75,000 – with 72 percent of parent’s never expecting their kids to pay them back.
However, the recently introduced Banking Code of Practice means adult children are more likely to have their mortgage application rejected, or be approved for a lower amount, when parents money is involved. Bottom-line is helping your kids into their first home can potentially backfire.
Banks are increasingly sceptical of a first-home buyer’s ability to service a mortgage, if the deposit is provided entirely or in part by their parents. According to DFA data, first-home buyers who have never developed a savings mindset, are twice as likely to default within five years, if they received help from the Bank of Mum and Dad.
Adding insult to injury, if parents have to draw down on equity in their property to raise the money – which two thirds have done in the past – they could jeopardise their own financial wellbeing in the process.
Is gifting money to adult kids against your better judgement?
If you feel Shanghai’d into gifting your adult children money that you can’t afford, then you owe it to yourself to consider a more holistic solution. Remember, the retirement money you’ve saved was never meant to be a proxy for your kid’s estate planning.
Fortunately, tighter regulations seemed to have saved parents’ from misplaced largesse in helping adult kids get into the property market. But industry estimates suggest it’s again on the rise – at a ratio of around one in every five – with the average amount being handed over to kids now between $30,000 and $40,000 dollars.
While banking regulations alone aren’t going to stop adult children successfully tapping the Bank of Mum and Dad, it’s time for parents – and their kids – to think about solutions that are equally considerate to their wellbeing.
Consider opening an InvestSMART ETF fund
There are other ways for parents to support their children with a home loan without handing over large wads of money, with no strings attached. One option is to help them build a sizable deposit that can be drawn on to fund a deposit, and then paid back over time.
One way to do this could be by opening an InvestSMART Balanced Portfolio, and surprising your kids with it this Christmas. By investing in a blend of 5-15 low cost Exchange Traded Funds (ETFs) with an even allocation across defensive income assets (bonds and cash) and growth assets (shares and property), an InvestSMART Balanced Portfolio can help reach the deposit for a home loan, considerably faster than earning 0.9% in a term deposit.
Rather than handing money on a plate, one alternative could be to deposit an initial $15,000 into an InvestSMART Balanced Portfolio, which since inception on 29 December, 2014 has returned 7.2 percent p.a. Assuming an initial investment of $15,000 is matched with regular contributions of $690 a month, the InvestSMART Balanced Portfolio you opened would be worth $82,629 within just six years.
Help your kids, but don’t catabolise your retirement
Given that you’ve got your own retirement to think about, you can work out a way for your original deposit into an InvestSMART Balanced Portfolio to be repaid at a later date. Getting your children to make regular contributions will prove to the bank - when they apply for their home loan – that they’ve had some ‘skin in the savings game’, and not just relied on handouts.
Asking for the original stake to be repaid, will also remind your kids that money doesn’t grow on trees. Don’t be afraid to formalise the process by which you’ll be repaid via written agreement.
This will help avoid any complications getting the money back, especially if there’s a dispute about whether the money was a gift or a loan. It will also minimise the risk of loss if children separate from their partners and the property is sold, with the proceeds halved between the two mortgagees.
Alternative avenues of helping adult kids
Given that it’s an absolute drogue on savings, one way to help your kids into their first home could be to clear that pesky credit card debt or personal loan they’re paying 18 to 25 percent interest on. Alternatively, you could consider paying their student loan debt, or school fees if they have kids of their own.
While it could be messy if your child defaults, acting as a guarantor could be one way to help your kids into home, without costing you any money. Alternatively, if you don’t like the risks associated with playing guarantor, a flexible alternative could be to co-share their monthly mortgage payments for a while, or let them live rent-free at home for the next two years.