Helping a Child Buy a Home Without Breaking the Bank

Strategic Insights -

Financial expert Nicole Pedersen-McKinnon offers a range of options to parents looking to assist their children in purchasing a home without depleting their own assets. These include equity extraction, selling and downsizing, and reverse mortgage options. However, it's crucial to consider the potential risks and benefits associated with each approach. Pedersen-McKinnon emphasizes the importance of ensuring the child has "pain in the game" and is financially and psychologically invested in their decision. She also advises parents to consider safeguarding their own assets and exploring alternative solutions.

Key Takeaways:

  • Parents can consider giving a portion of their cash to their child, but they must be aware of the pension gifting restrictions and the risk of losing money if the child is unable to meet repayments.
  • Equity extraction is a viable option, where parents can use their home as security for their child's loan, but there is a risk of losing the home if the child defaults on payments.
  • Parents can sell and downsize their home to release cash and give equal shares to their children, which can alleviate the risk of running out of money and provide a solution to both their children's needs.
  • Reverse mortgage is an option for those over 60, which allows them to release a percentage of their home's value in cash without making repayments, but interest rates are high and there are limited alternatives available.
  • Parental contributions into property is a significant factor in the rise of prenups or binding financial agreements in Australia, and it's essential to quarantine money from any potential partner.
  • Parents can also consider equalizing contributions in their will, such as giving more assets to their son, as a way to provide a solution without breaking the bank.

Statistics:

  • Over 60% of Australian homeowners aged 40-59 are concerned about being unable to afford retirement and rely substantially on their superannuation (Source: ASIC: 2019 Newstart and superannuation study).
  • 71% of parents plan to help their children financially with buying a home, but 63% worry about running out of money themselves (Source: Consumer advocates Firstlink's 2020 survey).
  • About 20% of Australians over 65 have considered a reverse mortgage, with 45% indicating they would consider it in the future (Source: Future of Retirement Summit).

Sources:

  • Nicole Pedersen-McKinnon
  • ASIC: 2019 Newstart and superannuation study
  • Consumer advocates Firstlink's 2020 survey
  • Future of Retirement Summit