A lot of my clients are telling me “I want to help my children buy a home.” This is understandable given the average house price as a ratio to average income is the highest it has been in half a century (See graph below). However, when does helping your children become detrimental to your own retirement plans? The answer is in almost every case because most people are doing it the wrong way.[i]
Two thirds of Australian households own or partly own their home. The average wealth of owner occupied households with a mortgage is around $857,900 and for owner occupiers who own their home outright it is around $1.4 million[ii]. The average superannuation balance for Australians aged 45 – 54 is $151,500 for males and $90,800 for females. Australians aged 55 – 64 have an average balance of $322,000 for males and $180,000 for females.[iii]
Most people who typically help their children to buy a home will do so by making a cash contribution towards a property deposit while equity in the home remains untouched. This reduces your assets outside of your home thus reducing your capacity to earn a retirement income.
There are three ways you can help your children and not have a detrimental impact on your own retirement plans:
- Rather than giving cash, you may be able to use the equity in your home to be guarantor for a loan your children take out with a bank to buy a home. In many instances this may remove the need for your children to pay lenders mortgage insurance. This can save up to 1-2% of the home purchase cost.
- Loan money to your children rather than give it. If you do have some surplus cash earning below 3% you can make an arrangement with your children where they pay you interest at a rate above what you would earn from the bank and below what they would pay to a bank. This is nice little win-win scenario.
- Accept your children may do things differently to how you started out. What does this mean? It may actually be more efficient for your children to continue renting where they live and purchase an investment property. The tax deductions and rent can be less than them paying a principle and interest home loan. Thus, they can balance living where they want to live for the lifestyle they want whilst still having an exposure to property as an investment.
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