A growing number of kids are relying on the Bank of Mum and Dad to get a foot in the door. Here’s how to protect that foot from getting hammered.
The Generational war between parents and their adult children over money has never been more intense or sensitive.
The clash is over parents wanting to ensure they are financially secure to enjoy their retirement and longer life, while their adult kids want their inheritance early to assist in buying a home or funding their own lifestyle.
It’s a battle which can lead to envy and acrimony within families and relationships.
It even creates friction in my relationship with Libby. One of us takes the view that it’s our money, we’ve worked for it and it has to last longer as we live longer… so forget the kids. While the other believes it’s tougher for Gen X, Y and Z to get ahead and we should help financially.
You can decide which one of us holds which view.
What’s best for the children
The reality is all parents want what’s best for their children. And they’re coughing up to show they care.
According to DFA household surveys, the total amount lent by the Bank of Mum and Dad is around $30 billion, putting parents in the top 10 lenders in Australia.
A study of more than 1,011 Australians commissioned by finder.com.au found that 44 per cent of parents provide financial help to their adult children. Lending money and cash handouts are the most popular ways they contribute financially. That’s not just the traditional ‘help kids buy a house’ either (only 7 per cent of respondents were chipping in for a house deposit). It’s also money for groceries (23 per cent) and bills (14 per cent).
We’ve seen too many people financially ruined through backing their children into businesses or going guarantor for a loan and losing everything.
So here are five ways that 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.