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The Bank of Mum and Dad: How millennials are getting into the property market
Baby boomers are the wealthiest generation in history. In Australia, as baby boomers move into retirement, we will see a massive transfer of wealth to millennials to the tune of up to $3.5 trillion over the next 20 years.
As property prices have soared in many parts of Australia, this wealth transfer has already begun, with many millennials turning to the Bank of Mum and Dad for help getting on the property ladder.
Why is it that millennials need help from their parents?
Quite simply, necessity. House prices have surged while wage growth has remained sluggish. Over the last forty years, the gap between income and house prices has widened significantly. In June 1981 the median house price in Sydney was 3.3 times the average disposable household income. Come 2015, that number more than doubled to over 7. According to the ABS, the average household income in Australia is currently just over $110,000. In Sydney, where the median house price is now over $1.3 million, that ratio is an eye watering 11 to one.
It’s little wonder that millennials are turning to their parents to make their home ownership dreams come true. So, how can parents help?
Lending or gifting money for a deposit
Even avid savers in the current environment may struggle to save a deposit fast enough to keep up with property price growth. Waiting till you have enough money for a deposit can instead mean you fall further behind as the growth in the deposit you’ll need outpaces the speed at which you can save it.
For parents who have cash in the bank, a loan or a gift to go towards the deposit can be a big help.
Parents should keep in mind that a lump sum gift is a great way to pull together a deposit, but the borrower will still need to prove that they can save as well as afford their repayments on their own in order to secure finance.
Parents with equity in their home may be able to leverage it in the form of a redraw or remortgage to go towards their child’s deposit. They should speak with their broker or lender to determine whether that option is currently available to them or whether they may need to refinance to another bank.
Acting as a guarantor
When a parent acts as a guarantor on a loan they offer up part of the equity in their home as security to the lender. The borrower will only need a small deposit and may avoid lenders mortgage insurance.
What this means in practice is that if the borrower defaults on the loan, the guarantor will be liable for the repayments.
While this is a useful way for parents to help their children without having to outlay any cash, it can also be a risky strategy as their home will be at stake if their children can’t make their repayments. It’s important to clearly assess the potential risk from the outset.
Purchasing a property together
Some parents choose to buy a property with their children. The ownership structure would generally be established as “tenants in common” and depending on how much each party puts in towards the deposit, one party may own a larger stake of the property. Before considering this option, both parents and kids should be clear on the potential scenarios, should one party wish to sell their share in the future.
Speak to professionals
Whichever option you’re considering and whether you are the parent or adult child in this scenario, it’s best to do your research and seek the right advice before taking any action. Talk to your broker, financial planner and lawyer to determine what structure will be the most workable and affordable for both parties.
If you’re looking at options to seek financial help from Mum and Dad to buy a home or investment property, or you are a parent wanting to help your child with a property purchase, talk to the team at Orium Finance today to discuss your options.
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