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What to consider when helping your children buy a home

So you want to help your children buy a house. But will that generosity hurt your down the line?

Does this scenario ring any bells? You’ve worked hard and built yourself a comfortable financial position. Now your kids are growing up and you’re wondering if you should be doing something to give them a head start in life by helping them to buy their first home.

It’s natural to want to help

There are many reasons why you’d want to help – after all, what kind of parent doesn’t want to do the best for their children?

Plus, it probably feels like everyone else is doing it. Recent research shows 55 per cent of first home buyers received help from the bank of mum and dad1.

Be aware of the risks

While giving them a financial leg up may be a great thought, according to MSI Taylor Wealth Management partner, Peter O’Callaghan, it requires serious planning and you’ll need to be aware of the potential dangers.

First of all, he says, you need to find out whether you can actually afford to help, which is about more than simply having the money at hand or equity in your home.

He says the emotional drive to support their children can sometimes blind parents to the financial reality.

“I have a client who effectively gave each of their four children $50,000 towards buying a house,” he says.

“That $200,000 outlay has dropped their income in retirement by $10,000 a year and that’s meant the wife is 68 and still working because they can’t manage their lifestyle needs just on the income they get.”

And that’s not the only risk.

Using your own capital to guarantee your child’s mortgage or loaning them money, can leave parents exposed if the child runs into financial trouble. And when that happens, how many parents are going to force their children to keep paying them back amid serious hardship?

Put your future first

Ultimately, O’Callaghan says, parents need to look after their financial needs first, before helping their children.

”It’s like when you get on an aircraft and they go through the safety demonstration. They tell you to fit your own mask before you fit the mask on your child because you’re going to be of no use to that child if you don’t have any oxygen,” he says.

“It’s a similar sort of situation here. You don’t want to give away all your assets and then have to go back to your children for help.”

The emotional drive to support their children can sometimes blind parents to the financial reality.

Start early, plan ahead

The key, according to O’Callaghan, is proper planning.

If parents start putting money aside regularly for their children early on, they will be in a much better position to help them once they reach adulthood, he says.

Encouraging good saving patterns in children from an early age, such as saving 10 per cent of their pocket money or their wages from a part-time job, can also make a huge difference in the long run.

Another way to help is for parents to pay for children to get proper financial advice early in their adult lives so they can start their finances off on the right foot and be building up a deposit.

“That way they can get some guidance around strategic directions: how should you be allocating money? Should you be putting more money in super? Should you be investing for the longer term?” he says.

A first home doesn’t have to be the dream home

Finally, O’Callaghan says, parents should consider guiding their children towards a more modest first home, perhaps one a little further from the city or one that needs work.

That way, they will have a lower mortgage and lower repayments, and can build up equity in the home to allow them to upgrade in the future.

“You can negotiate with them the idea that maybe living in the outer suburbs, rather than the inner-city, is not a bad thing because it allows you to get a foothold into the market.”

Speak to an adviser

Before you make any decisions about helping your children buy their first home, it may be worthwhile talking to a financial adviser. They can help you assess your situation, so you can make informed decisions that don’t negatively impact your own financial future.

Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (Colonial First State) is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. Colonial First State also issues interests in products made available under FirstChoice Investments and FirstChoice Wholesale Investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from colonialfirststate.com.au or by calling us on 13 13 36.

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