Owning your own home in Australia is still one of the best methods of wealth creation, with property prices continuing to grow.
Despite the recent weakness in Melbourne and Sydney property markets, the average value of Australian dwellings has risen 7.6% in the last 12 months to July according to the latest report from CoreLogic/RP Data,
In addition, the average owner occupier mortgage across Australia is now an eye watering $636,597 – the highest on record.
While rising housing prices are good news for those with an established property portfolio, the increased amount that younger Australians must borrow to get on the property ladder is problematic for many.
Many older Australians have kids in this situation, or at least approaching it. Naturally they want to help, and transferring some of the wealth they have earned through their own property in recent decades seems like an obvious way to do this.
But what are the most effective ways of transferring wealth to your offspring to help them get ahead in property?
Here are three tips to consider:
Tip 1 – Guarantee your child’s home loan with your own property
One of the best ways to help your kids get on the property ladder is to use the equity in your own home to guarantee the loan on theirs.
As mentioned above, the size of the average mortgage these days is at record highs, meaning that getting a deposit required for first time buyers can be a challenge.
One way to help with this is to get your kids to use the equity in their parents’ property as a guarantee on their home loan. This can effectively act as part of their deposit (subject to terms from the lender, which vary significantly), and help them avoid Lender Mortgage Insurance (LMI) by increasing the size of the deposit to 20% of the purchase price.
While this may seem risky on first take, it’s worth noting that the only at-risk component in your own property is the 20% deposit, not the whole value.
Tip 2 – Protect your wealth with a binding agreement
It’s an unfortunate fact of life these days that nearly one in three married couples end up going through a divorce, and that process can have big implications for your property wealth.
Australian property law stipulates that property assets are split equally (ie. 50% each), but this can be complicated by several other factors when couples go their separate ways.
One way to avoid confusion if this occurs is to put in place a binding agreement, which is a legal document that sets out the way a couple’s assets will be divided if their relationship breaks down. For most people, their property will be their biggest asset and should be at the centre of this.
A binding agreement can provide the flexibility to identify and protect the assets that matter most to you and can be tailored to ensure that your children inherit them. It could also potentially save you thousands in legal fees if this situation arises.
It’s worth noting that these agreements are quite complex legally, and contrary to popular belief, a binding financial agreement can overwrite the courts if done properly,
Therefore, it would be prudent to have an experienced legal expert to look into this for you. Any good mortgage broker should be able to refer you to someone who can help you navigate this from a property perspective.
Tip 3 – Consider helping your child pay of HECS debt
Most of us will encourage our children to achieve the best educational result they can, but the debt they can accumulate in doing so can be financially limiting for many young people.
When it comes to buying property, this debt can restrict their lending capacity too, as the repayments will be considered by the lender when determining how much they can borrow for a home loan.
One way that parents can alleviate this scenario for their kids is to consider paying off their HECS debt.
The way HECS dept repayments are calculated is based on the income you child is earning not the outstanding balance – you can check out the ATO guidelines on this here.
As a result, paying off a relatively small HECS debt can have a big impact on borrowing capacity.
For example, if your child earns $120k they will have to pay 7.5% of their after-tax income in HECS repayments. A relatively small HECS balance of 15k will reduce a home loan borrower’s ability to repay by around $100k on a 30 year loan.
By eliminating this debt up front, you will be increasing the amount of money your child can borrow to buy a property, which could be critical to them securing a home in a rising market.
In addition, if they are no longer making repayments on their HECS debt, they should have more opportunity to save up a bigger deposit. This will save them thousands in the long run.
While there are several other ways to transfer wealth through property – many of which involve complex legal structures – we believe the above three suggestions are a good starting point for most Australian parents who own property.
And you never know, your kids may even thank you for it too!
While rising housing prices are good news for those with an established property portfolio, the increased amount that younger Australians must borrow to get on the property ladder is problematic for many.
Many older Australians have kids in this situation, or at least approaching it. Naturally they want to help, and transferring some of the wealth they have earned through their own property in recent decades seems like an obvious way to do this.
But what are the most effective ways of transferring wealth to your offspring to help them get ahead in property?
Here are three tips to consider:
Tip 1 – Guarantee your child’s home loan with your own property
One of the best ways to help your kids get on the property ladder is to use the equity in your own home to guarantee the loan on theirs.
As mentioned above, the size of the average mortgage these days is at record highs, meaning that getting a deposit required for first time buyers can be a challenge.
One way to help with this is to get your kids to use the equity in their parents’ property as a guarantee on their home loan. This can effectively act as part of their deposit (subject to terms from the lender, which vary significantly), and help them avoid Lender Mortgage Insurance (LMI) by increasing the size of the deposit to 20% of the purchase price.
While this may seem risky on first take, it’s worth noting that the only at-risk component in your own property is the 20% deposit, not the whole value.
Tip 2 – Protect your wealth with a binding agreement
It’s an unfortunate fact of life these days that nearly one in three married couples end up going through a divorce, and that process can have big implications for your property wealth.
Australian property law stipulates that property assets are split equally (ie. 50% each), but this can be complicated by several other factors when couples go their separate ways.
One way to avoid confusion if this occurs is to put in place a binding agreement, which is a legal document that sets out the way a couple’s assets will be divided if their relationship breaks down. For most people, their property will be their biggest asset and should be at the centre of this.
A binding agreement can provide the flexibility to identify and protect the assets that matter most to you and can be tailored to ensure that your children inherit them. It could also potentially save you thousands in legal fees if this situation arises.
It’s worth noting that these agreements are quite complex legally, and contrary to popular belief, a binding financial agreement can overwrite the courts if done properly,
Therefore, it would be prudent to have an experienced legal expert to look into this for you. Any good mortgage broker should be able to refer you to someone who can help you navigate this from a property perspective.
Tip 3 – Consider helping your child pay of HECS debt
Most of us will encourage our children to achieve the best educational result they can, but the debt they can accumulate in doing so can be financially limiting for many young people.
When it comes to buying property, this debt can restrict their lending capacity too, as the repayments will be considered by the lender when determining how much they can borrow for a home loan.
One way that parents can alleviate this scenario for their kids is to consider paying off their HECS debt.
The way HECS dept repayments are calculated is based on the income you child is earning not the outstanding balance – you can check out the ATO guidelines on this here.
As a result, paying off a relatively small HECS debt can have a big impact on borrowing capacity.
For example, if your child earns $120k they will have to pay 7.5% of their after-tax income in HECS repayments. A relatively small HECS balance of 15k will reduce a home loan borrower’s ability to repay by around $100k on a 30 year loan.
By eliminating this debt up front, you will be increasing the amount of money your child can borrow to buy a property, which could be critical to them securing a home in a rising market.
In addition, if they are no longer making repayments on their HECS debt, they should have more opportunity to save up a bigger deposit. This will save them thousands in the long run.
While there are several other ways to transfer wealth through property – many of which involve complex legal structures – we believe the above three suggestions are a good starting point for most Australian parents who own property.
And you never know, your kids may even thank you for it too! 