The cost of buying a home in our capital cities is now 14 times our annual income, up from five times the annual income in 1990.
Who’s doing it tougher, young homeowners today or their Baby Boomer parents who were paying 17 per cent mortgage interest?
It’s the intergenerational war of words that has been splitting families for decades.
I used to whinge to my parents and now my adult kids are doing it to me. Frankly, I don’t think it achieves much…. but here’s the answer.
It obviously depends on when the comparisons are made. For example, 18 months ago when interest rates were low, Baby Boomer parents had it tougher.
But today, after the sharp interest rate rises, young homeowners are doing it tougher.
While home owners in the 90s faced 17 per cent home loan rates, house prices were much lower.
Borrowers back then didn’t have to save for big deposits and they could borrow less to buy a home. The key difference between the 90s and now is that the average mortgage size has risen six times faster than wages.
The average loan size in Australia was $67,700 back in the 90s, and now it’s $593,000… even more if you’re buying in high-priced Sydney and Melbourne.
So Mum and Dad, the youngsters do have a point.
As a result, more Baby Boomer parents have been chipping in to help their adult children get a foot on the ladder.
A Compare the Market survey in April found that 26 per cent of millennial homeowners had received help from their parents to purchase property.
Optimise your Bank of Mum and Dad operations
Here are five ways you can help your kids get what they want without sacrificing your own retirement goals and financial security.
1. Educate the next generation
Teaching your kids about money should be a priority, particularly when they’re young.
Pocket money is a great way to teach your kids valuable lessons about saving and the value of money. Give them incentive by matching their savings dollar-for-dollar when getting them started, and encourage them to set financial goals.
2. Go guarantor
This means putting the equity in your house up as security for your child’s home loan… it’s easy but can be fraught with danger.
Financial planner and director of Financial Spectrum, Brenton Tong, says that solid rules must be put in place to reduce the risk if you choose adopt this approach.
“As soon as their debt has been reduced, and their property has gained sufficient value, they have to refinance you out. If they fall behind in repayments, they must sell rather than tapping you for more money,” he says.
Also limit the guarantee to a particular dollar amount. Never ever give an unconditional or unlimited guarantee.
3. Buy with them
This option can either make or break your relationship with your child, so tread carefully when considering it.
If you’re going to do it, it mustn’t be because they want a pricier property. “They need to learn to compromise and live within their means,” says Tong.
Ideally you should help them with the deposit only, that way you won’t get stuck with mortgage repayments if things go pear-shaped. Your child will be on the property ladder and, over time, you’ll both hopefully walk away with equity when the property value increases.
Make sure you are on the title deeds, but not on the their mortgage.
4. Lend them money through a third party
Unless you’re willing to part with the money for good, it’s best not to lend them money privately. To avoid putting a strain on your relationship, have a third party administer the loan on behalf of the Bank of Mum and Dad. Like an accountant or solicitor.
This puts clear rules in place or repayments and takes the pressure off you both. It’s safer for you and safer for your relationship.
4. Toughen them up
A controversial alternative for some, but one that one of us (can you guess who?) stands by: tell your kids that they have to suck it up and go it on their own.
There’s no doubt that it’s harder to buy your first home in today’s economy, even with interest rates at record lows. But as parents, we paid a whopping 17 percent interest, went without the flashy cars or gadgets and put overseas travel to the side until we built a stable financial foundation for ourselves.
And there are plenty of millennials doing it the same way today… it can be done.
Sometimes, making sure your kids know there isn’t any help coming can be the greatest help you’ll ever give them.