Can You Be Too Kind To Your Kids?
It’s
no secret that the property market in popular areas is very difficult
to break into for first home buyers. Many parents are lending a hand to
their kids in order to help them get a foot in the door, but sometimes
is it cruel to be kind? Join us today as we have a look at some of the
issues coming from loaning from the bank of Mum and Dad:
How Big is the Bank of Mum and Dad?
In
Australia, there is estimated to be as much as $35 billion in loans
from parents to their kids. Although the purposes may be mixed, the
majority of that is based in the housing market, with the average gift
being about $100,000 for a housing deposit. Host Andrew Baxter points
out that sometimes it is cruel to be kind and helping too much is not
necessarily helpful in the long run. What we leave behind for our kids
is often at the forefront for parents, and very few hesitate to help
their child when they need it. Is there such a thing as helping too
much? Perhaps sometimes parents can be overzealous with making their
childs’ lives too comfortable that they overshoot and end up preventing
them from gaining valuable life experience.
The Risk of Interest Rates Increasing
It is a nice gesture of a parent to loan their child money to get a house, but as Host Andrew Baxter points
out, the consequences could be sobering for those who are heavily
geared. Interest rates are bound to go up over the next few months, and
banks are already preparing for the potential consequences when they do.
Those kids who have been given this money from their parents may have
all of a sudden had their hands on a deposit, but at the same time
interest rates were so low that they were able to service the mortgage
repayments. Deposits have a two-fold purpose for banks. Firstly they are
there to offer a lump sum for the bank to loan against, and secondly
they are there to show fiscal responsibility of the loanee. With
interest rates set to go up – potentially aggressively, these repayments
are bound to increase quite steeply for those with variable rates on
their home loan and not everyone will be able to make their repayments.
We should hope that the help offered by parents does not result in a
defaulted mortgage.
The Harm of a Drop in Property Prices
With
the way property prices have been going in heavily populated areas, it
would be easy to think prices are simply never going to come down. The
reality is that they will come down, and it is a matter of when and not
if as some would have you believe. As a homeowner, there are problems
that come along with price drops in the market even if you’re not
looking to sell at the time. Host Andrew Baxter expertly
points out that you can swiftly find yourself in a position where the
debt owed to the lender is greater than the value of the property
itself. This is called negative equity and it is a very scary prospect
for those who are obligated to pay off a mortgage on a house that has
lost value. Usually these price drops coincide with higher interest
rates as less people want to or are able to take out a mortgage when
repayments increase. This is when we see a compounding impact and it is
something to be mindful of when thinking about the size of a loan. It is
times like these where parents and children who have become embroiled
in a mortgage together need to sit down and strategize as to how they
are going to tackle the issue.
Wages vs Property
One
of the most topical Australian issues (particularly heading into the
election) is property prices running rampant as wages sit stagnant.
Co-host Mitch Olarenshaw points
out that in 1970 the average house was purchased at about 4 times the
value of the buyer’s yearly wage, while now it is closer to 14 times.
This is one of the key issues facing young Australians trying to break
into the housing market, likely the key driver in today’s overarching
topic of increasing help from parents. The reality is that lending is
not as responsible as it should be anymore, with banks granting loans
where recipients are much more heavily geared and owe a great deal more
than they used to. The rampant property growth presents a major issue
which is different from the issues faced from homebuyers say 30 years
ago. Perhaps as well as money, you parents may be able to offer some
guidance on how to tackle the housing market and manage your mortgage
once you’ve taken the loan out.
Financial Literacy is Key
Making financial decisions based on emotion has never been known as a successful strategy. Host Andrew Baxter’s main
advice for anyone is to become financially literate before putting
yourself in positions where you may need to make critical financial
decisions. There are multiple avenues to explore for advice but
sometimes trying to help someone mightn’t actually be the right thing.
After all, the biggest risk in life is the one you don’t know about.
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