Think carefully before using hard-earned equity from family home to fund a holiday home.
Helping children enter the property market is about more than just financial assistance
With affordability a real challenge for today’s young adults, substantial media attention is centred on the topic of parents providing financial assistance to their children. The practical advice usually revolves around how to provide low-cost loans or gifts for part of the deposit, or the wisdom or otherwise of going guarantor on the child’s mortgage.
However, seemingly never far from the surface of the discussion is an intergenerational tension: whether young people ‘deserve’ this help or how baby boomers’ stranglehold on property assets give young people little choice but to go cap in hand to the bank of mum and dad.
This combative context is unfortunate. Not only does it threaten to sour what is generally a wonderful expression of love within a family, but it also obscures a more important role for parents to their child: that of mentor and counsellor.
Many children look to their parents for property advice. It’s all new to them whilst the parents often owns a home and perhaps other assets. And it’s no surprise that parents are often all too pleased to share their wisdom.
Tread carefully is our advice for parents in these circumstances. Will you end being a help or a hindrance? Are you confident you’ll provide advice that will assist not detract?
You see, many parents draw on their own experience when shaping and delivering advice. Many are baby boomers who bought their first home when land was relatively cheap and building costs much lower than they are today.
They could afford – although it was a struggle – to buy houses on reasonable sized blocks. The classic Australian Dream. Enough room for a brood of kids and a dog.
The suburbs weren’t always the trendiest ones. They might have been outer suburbs (at least at the time – often they are middle suburbs now). This experience may condition parents to think that their children must buy a house. And a roomy one at that.
But that advice may be unhelpful. To achieve such an end today, first homebuyers have to buy in distant suburbs, sometimes 30 or even 50 kilometres from the CBD. They may also be buying properties with more bedrooms than they’ll ever need. Families tend to be much smaller now.
Follow mum and dad’s 1980s-fashioned advice and the kids may end up with a property that isn’t home sweet home but a burden.
The reality is that today, they may well be better off starting with a good 2-bedroom apartment in an inner suburban location as a first home. It is likely to be closer to work and the amenities they seek. And, importantly, the inner suburban 2-bedroom apartment will grow faster in value than the far-flung house.
The aim is for the apartment to be a stepping stone to buying a house in five or six years, say after kids come along and they outgrow the apartment. There will be equity in the apartment, and it will give them the buying power to secure something not too far out.
The key thing is to pay down debt quickly as this – with capital growth – will build equity quickly.
Another issues parents may have is a disproportionate dislike of is debt. When they were young it was hard to borrow money and the conditions attached were challenging. Moreover many remember interest rates at 10, 15 and even 17%. Being careful with debt is always wise, but this experience may make them unduly conservative about borrowing money and encourage their children to minimise borrowings and buy ‘cheap’ property. This could exacerbate the problem above.
Finally, owning a home need not be the must-achieve life goal of yesteryear. Today’s young adults are just as wise to consider buying an investment property, as then they can rent wherever they want – and often get great value and amenity for their lifestyle needs – whilst also investing in a quality property without compromises.