It’s one of the small ironies of life that just as you get to a point where you feel more financially secure – where you’re about to own your own home lock, stock and barrel – you realise your kids have never had it so tough.

You’re not alone. While it’s always been challenging to get started in life, the government’s latest HILDA survey1 confirms there is a growing wealth divide between the older and younger generations.

Why? In large part because of the housing market. The 2017 report finds that home ownership for those aged under 40 has dropped to 25 percent, down from 36 percent in 2002.

How will the cost of living impact your kids?2

Average weekly income 2010

Average weekly income 2030

$961.48 ($1061.28 – today’s equivalent)

$2,511 ($2,815 – today’s equivalent)

Average house price 2010

Average house price 2030

$595,745 ($657,582 – today’s equivalent)

$3,388,800($1,744,761 – today’s equivalent)

Average petrol price per litre 2010

Average petrol price per litre 2030

$1.27 ($1.40 – today’s equivalent)

$3 ($1.13 – today’s equivalent)

How you can help

You’re probably already one of your children’s greatest supporters emotionally. But it’s understandable that you might want to help them out financially – even go so far as to help them buy their first home.

But before you do so, you need to carefully consider just what you can afford. While the money for a deposit might help your children, it’s unlikely to make anyone happy if you jeopardise your hard earned retirement savings.

Making promises

One option is to become your child’s guarantor – to use the equity in your home as additional security for their home loan. It’s a way of promising the bank that if your child fails to repay their loan, you will do so in their stead.

The big benefit for your child is that it reduces their loan to value ratio, which can in turn reduce or eliminate the need for them to pay Lender’s Mortgage Insurance. At the very least it means they won’t have to save up such a big deposit, speeding up the time it takes them to get into a new home.

This decision shouldn’t be taken lightly though. If your child ends up not being able to make their loan repayments, and you don’t have the money either, you risk losing your own home.

All of this makes it critical that you get independent financial and legal advice which takes into account your retirement needs and plans before you enter into the guarantee. Special lending criteria apply to family guarantees so you should speak to your financial adviser or mortgage specialist before making plans.

The power of two

But maybe you do have some spare cash. If that’s the case you could use the equity in your home to help buy a house in partnership with your children and thus share the burden of repaying the loan.

Again, this comes with attendant risks. Your child (and their partner) may have a few different ideas about what to do with the home. The possibility of the partners separating should also be considered. It makes it very important that you agree to some ground rules first and put them in writing.

And remember, if you sign as a joint borrower, you’re equally responsible for the entire home loan and must make sure it’s repaid, even if your child ends up defaulting. It is important to seek financial advice first.

Investing in the future

Maybe your kids are still teenagers. Would it be worth making use of the substantial equity in your home to buy an investment property for them? That way they could start adult life a big step ahead.

Or is it an even better idea to use that equity to help with their education costs, including any school or university fees? There are clear benefits to this. On the other hand, buying an investment property for them isn’t something to be taken lightly. If you give it to them as a gift there are significant tax consequences, including stamp duty and a hefty capital gains tax.

There is also your child to consider. It might make things easier for them but will it provide them with the skills to handle other challenges in life? Will they learn the true value of money?

One way to protect them from their youthful selves is to keep the property in your name until they’re old enough, and mature enough, to really make the most of it. There’s a good chance they’ll thank you one day – as you both enjoy a financially secure future. Make sure you get some legal and financial advice around the possible stamp duty costs and taxation implications of owing and then transferring the property to your children.

Ready to discuss the best way to help out your kids?

Request a complimentary financial planning consultation

Or talk to your mortage specialist.

The information in this article should not be relied upon as financial advice as none of the information provided takes into account your personal objectives, financial situation or needs. NAB recommends you seek the counsel of an independent financial or legal adviser before making any investment or estate planning decisions.

(c) National Australia Bank Limited ABN 12 004 044 937, AFSL and Australian Credit Licence 230686.

Footnotes

1The Household, Income and Labour Dynamics in Australia (HILDA) Survey. Go to www.dss.gov.au

2Budget Direct, 2014

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