With housing affordability spiralling out of control in most Australian markets, it’s no secret that more young home buyers
are turning to the bank of mum and dad for help.
This help most commonly takes the form of a gift of money, or parents becoming a guarantor of their child’s home loan.
While the merits of these types of ‘hand-outs’ are keenly debated, helping your children to enter the property market isn’t all about splashing the cash.
As a parent - and most likely a home owner – the best form of assistance you can provide is your home buying advice, garnered from many years of first-hand experiences.
This education starts years before they are even thinking about buying a home and continues throughout the home-buying process – even right through to when they are parents themselves!
Here are the five home truths every parent should tell their children about buying their first home:
1. Learn to be smart with your money
The large sum of money required to cover upfront costs – the deposit, and lender and government fees and charges – are well documented as the biggest barrier for first-time home buyers entering the property market.
In a bid to give your child a head start to reach the figure needed, encourage them to establish a regular savings plan once they have a steady income. If they put away $50 a week for three years, while working part-time through university or during their apprenticeship, at the end of three years they will have approximately $7800 saved.
When they experience increases in their wage, encourage them to place more of their weekly income into their savings account rather than spend it.
Simple tips on how your children can maximise their savings include:
• Set a budget and stick to it;
• Limit the number of times they venture out each week for meals with their friends;
• Look at how to reduce the amount they pay in rent, gym memberships and phone bills;
• Limit holidays and weekends away;
• Seek advice from a financial institute or advisor on where their savings are best placed to gain the greatest returns, for instance a term deposit, managed funds or in shares.
Explain to your kids that the greater their deposit, the less money they will have to borrow, meaning lower repayments. It may also minimise the amount of Lenders’ Mortgage Insurance they need to pay.
2. Start educating your children early
As parents you know that the housing market and the ins-and-outs of financial products can be complicated - so slowly familiarise your children with these concepts.
This could even include taking your teenage children to open inspections and auctions, when you are looking to invest or buy another property yourself, so they understand how these aspects of the property market work.
As your children mature, initiate conversations on topics like interest rates, teaching them things like the difference between variable or fixed rates. This information is not only beneficial when looking to buy a home, but this general finance knowledge is important if they have a credit card or take out a personal loan.
Also teach your children the value of shopping around. When it comes to home loans, and finance products in general, there’s a multitude of loan features and products so it pays to broaden your search. For example, some lenders such as HomeStart Finance offer low deposit options, which significantly reduce upfront costs of buying a home and enables a home buyer to break into the market sooner. For someone who hasn’t been able to save a substantial deposit, or is keen to fast-track their property purchase, this could be the perfect option.
3. Who to turn to for advice
While seeking advice from mum and dad is the first step for many first-time buyers, there is also an array of other sources they can turn to – let your children know of the options.
These include speaking with their financial institution or a mortgage broker, as well as carrying out their own research on the Internet and using home loan comparison sites and online calculators.
4. An ongoing financial responsibility
The responsibility of owning a home doesn’t end when your child puts the deposit down on a house.
Budgeting and comprises continue as they meet their mortgage repayments while facing other financial obligations such as the day-to-day costs of raising a family, utility bills, council rates, ongoing home maintenance costs and lifestyle wishes such as holidays and new cars.
Remember to demonstrate these money habits and behaviours yourself when trying to teach your children to budget and compromise.
5. Why buying a home is their best option
Buying a home is one of the best financial decisions your child can make and it remains one of the best ways to set a course towards a secure financial future.
Housing is considered a safe, steady investment and house prices generally rise significantly over many years. Take for instance the median house price in metropolitan Adelaide in December 2016 stands at $440,000, whereas in March 2006 it was $280,000 – equating to more than a 44% increase in just over 10 years.
While house prices rise, the level of loan debt reduces at the same time, meaning that the wealth of the your child steadily grows.
Making mortgage repayments is also considered a form of ‘forced saving’. It is very difficult to save and invest a similar amount of money while renting as to what your child would be paying in home loan repayments.
On top of this the benefits of buying a home in your 20s and 30s, not only delivers benefits for the next 20-30 years, there are longer term benefits reaped during your child’s retirement.
A recent research from Swinburne University
has found that Australians who are still renting by the time they hit middle age, have higher chances of struggling financially in retirement.
Take away message
At the end of the day, whether you have a lot of money or not much, one of the greatest gifts you can give your children is the knowledge to help them develop sound money habits and help them prepare to buy their first home.