Helping your kids onto the property ladder
by Grant Warnes_Senior Property Investment Adviser
One of the really pleasing aspects of my job is advising my clients who wish to help their children invest in property, to help them take that first step up the ladder. It can be parents in their forties investing for their young children’s future, or it can be baby boomers who still have a twenty-something living at home and earning a respectable income. It’s the latter scenario I’d like to focus on in this article.
Scenario 1 - Assisting your child in their early twenties
First of all, imagine your eldest child, at the grand old age of 22, approaching you this week and declaring that he or she would like to purchase their first property. Despite still living at home, they’re earning a decent salary. Myself, or someone else in the John Hopkins Group, then recommends a property worth $350,000 and you’re happy to assist your child with the ten per cent deposit to secure it – namely, $35,000.
If the past is any indication of the future, then it’s reasonable to suppose that on average property prices double every seven-to-ten years. The Rule of 72 (http://en.wikipedia.org/wiki/Rule_of_72) shows that if you have an average compounding capital growth rate of 7.2 per cent on a property, the price will double after ten years. And for prime residential Australian property, that’s a conservative growth rate.
Scenario 2 - Assisting your child in their early thirties
Now imagine that it’s ten years down the track, in 2019, and your eldest child, this time 32 years old (and hopefully not still living at home), approaches you with the very same request: to help him or her make their first property purchase.
Supposing that the $350,000 opportunity was passed up back in 2009, that same property will now be worth $700,000. So should you be willing (and able) to help with the ten per cent deposit, you’re now looking at $70,000, double the cost of a decade ago.
If you’re thinking seriously of helping your children get onto the property ladder today – and the sooner the better as you can see from the above example – then it’s worth looking at the ways you could fund the ten per cent deposit.
So, by what means can I assist my child financially?
- Cash
- Existing equity in your Principle Place of Residence (PPR) or a residential investment
- A Family Pledge Loan¹
- A 50/50 investment, depending on your child’s cash flow/savings
The purpose of this article wasn’t so much to show you that you can help your children purchase a property, but that there are exceptional benefits in making such a move early on, today rather than tomorrow, and before they get too old.
The beauty of leveraging
As you can see, this is because of the leverage of time (ten years) and the impact this has on the property’s value, and how your child will in turn be able to use that leverage against a second or even third property further down the track.
And isn’t that exactly what you would want for them?
¹ A Family Pledge loan is when a family member supports another family members application for a home loan by either offering income support, or the equity in their own property, to assist with the deposit and/or servicing the debt, essentially obtaining a larger loan than they would have without the family pledge.
For more information, or to arrange an appointment with a John Hopkins Property Adviser, please contact our Client Liaison Officer on 1300 726 082 or click here.