Parental loans in the property market
While saving for and approaching retirement, it is becoming increasingly common for parents to assist their adult children in entering the property market. Given the high propensity of parental loans, financial advisors are expressing growing concern for the financial security of older Australians.
Given the unaffordability of the property market in Sydney in particular, it is no surprise that there is a trend of adult children staying in their family homes much longer. As well as this, many adults are seeking out loans from their parents, or listing their parents as guarantors for bank loans in order to purchase their first property.
While many see parental loans and guarantees as perfectly fine, the RBA are expressing concerns about the superannuation of the older generations. It has impacts on what parents are saving for as they approach retirement, and this is a growing concern around the world, not only in Australia.
It has been estimated that approximately 52% of individuals entering the property market are seeking loans from their parents to buy their first homes. Given the rising house prices in Australia in the last ten years (prices are up 73%), the amounts first-home buyers are requesting are also rising. The average parental loan request has risen from A$23,173 in 2010 to A$83,397 in 2016. This increased cost of housing also affects how much support parents are able to provide to their children. Five years ago the most common assistance parents gave was to be the guarantor on a loan, however now 40% of help is to put together a deposit, and almost 25% are to subsidise ongoing mortgage repayments. Less than 20% of loans are currently guaranteed by parents.
HELPING OUT OR HANDING OUT?
It is understandable, and amiable that parents are willing to help their children enter the property market, however they need to be cautious when doing so. If these parents are taking money out of their superannuation or savings to do so, they may leave themselves exposed to debts in their retirement, or short of money if they underestimate how much they will need to live comfortably.
The safest approach for parents to take is to act as a guarantor for children to get a loan through a financial institution. This still is quite risky if the children are unable to make repayments. Family pledge loans set a limit for the guarantee, which will help minimize the risks involved in acting as a guarantor, and it is advised that if you do take such a route, that you look at exiting the arrangement as soon as feasible. The property should be regularly re-valued to monitor when it might reach a point at which the lender would be comfortable releasing the guarantee. All contributions made by parents should be legally documented with set terms after careful consideration to ensure it remains a loan, not a gift.