Owning a home is the great Australian dream, it is something that is drilled into you from a very early age. The desire to own your own home is so strong that people can feel pressured into taking the plunge. Saving a deposit for your first home takes time and patience, it also means the lifestyles that people enjoy may need to be curtailed to a degree in the short term. To assist first-time home buyers get into the property market, there is a growing trend among Australian families for parents to gift funds to their children to cover the shortfall deposit on their mortgage. While this approach does allow a new generation to get onto the property ladder, it may do more harm than good.
A recent report by the Reserve Bank’s economic research department used figures from the Household, Income and Labour Dynamics (HILDA) survey of 17,000 Australians to find that 30 per cent of people who needed help from their parents to pay for a deposit later found themselves in financial difficulty. The report showed that the 30 per cent found it difficult to cover the mortgage repayments and to meet other financial requirements like utility bills.
While parents that are looking to help their children get into their first home demonstrates a level of support that should be celebrated, it also highlights an issue that should be addressed before taking the step. Saving for a deposit and going through the process of budgeting gives people far more than a pool of money to draw from at a later stage. It teaches the principles behind smart money management and means you can view your income through the lens of essential income vs. disposable income.
There are other options that can be considered by families if they are looking to help their children move into property ownership. Rent-vesting is an option that gives people the benefit of owning a large asset like a house, with the ongoing costs of the investment property being covered by clever structuring that combines the rent with tax benefits without eating into salary or savings. The property investor then continues to rent in their desired lifestyle location (at a fraction of the cost of a mortgage). This satisfies the best of both worlds – living where you want and how you want without the cost of property ownership restricting lifestyle.
By looking at a smarter way to obtain a large asset like a house, the younger generation can break into the property market without placing themselves in financial risk. Helping your children to set themselves up for a stable future financially is an option that should be explored, if you have the means.
Ensuring that covering a deposit is not a quick fix that plasters over a larger money management issue, which may require additional financial support, is a key element that should be carefully considered. Investigating other options available for property ownership may be a better way of achieving the same result, without any undue financial stress on your children or yourself.