Don’t Let Your Children Have a Lend of You – Buying A Home

The data confirms what we boomers long suspected…home ownership was easier for our generation…

Australian Bureau of Statistics data has shown homeownership rates for people aged under 40 – the most likely group trying to buy their first home — are declining. Just 50 per cent of households within the 25-to-55 age bracket are expected to own a home by 2040, a drop of 10 per cent compared to figures from 1981., 31 March 2021

Back in the 80s, buying a home was not the ordeal it appears to be today.

Casting my mind back to our 1980s social circle (of working/middle class upbringings), I cannot think of anyone who complained about being priced out of the market or questioned whether they’ll ever be able to afford a home.

Over Easter we caught up with some friends and the topic of conversation turned to the booming property market.

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There were two emotional layers to this conversation.

Firstly, there’s the internal delight that’s disguised by comments like ‘the house next door (or down the road) has just sold for $X…this market is nuts.’ This related pricing technique is a way of conveying how much your place is actually worth, without saying it directly.

While trying to appear grounded and rational, inside people feel pretty smug about their place being worth more than $X.

Secondly, there’s some guilt…especially if your adult children are not homeowners. It was so much easier for you to get into the market and continue trading up.

Our conversation touched on:

  • Will our kids ever be able to afford to buy a home?
  • Should we be helping them out with a deposit?
  • Our kids have jokingly hinted at early access to their inheritance…you know what they say about many a true word said in jest?

In these situations, I try not to get involved. People want simple solutions to complex situations.

And believe me, when it comes to family dynamics, it can get very complicated. Jealousy. Accusations of favouritism. Emotional blackmail. Pillow talk from an in-law. The list of potential emotional triggers goes on.

Add money to this mix and you have the potential for a highly-flammable cocktail of emotions.

Trying to apply a one-size-fits-all solution is impossible.

While your intentions may be honourable and well-meaning, think long and hard before you make the offer of or agree to lending a helping hand.

What to consider before offering assistance to your children

For those who are contemplating an offer of financial assistance (for a home deposit or business venture or any other purpose), these are some points you may want to consider.

  1. Can we afford to lend the money? If it’s not repaid will it jeopardise our financial situation and more importantly strain our family relationship (parent to child and sibling to sibling)?
  1. Is the child mature enough to acknowledge the agreement is a loan and NOT a gift?
  1. If we lend money to one child does this mean we are committed to lending to another? No, it doesn’t. But you need to have a family discussion about this fact so that all parties know each loan request will be treated on its own merits?
  1. What is the purpose of the loan? Would a traditional money lender approve a loan for this purpose?
  1. Is the loan necessary, is it a whim or is it to repay another debt (perhaps a credit card)?
  1. Does the child have the capacity to repay the debt? If not, it’s no longer a commercial transaction, it’s a gift.
  1. If they do have the financial capacity, ask them to prepare the repayment schedule.
  1. Put it in writing so there is no misunderstanding about each party’s obligations.
  1. Retain file notes about the loan arrangement and the supporting documentation (income and expenses statement, loan repayment schedules, interest rate comparisons, etc) so that when the next child approaches you for a loan, they know what is required. If they fall behind, how do you enforce repayment? Between you and me I would hope never to get to this situation. Personally, I think I would blink. How can you repossess your child’s car or enforce a second mortgage? Life can and does throw unexpected challenges at all of us. They might be made redundant, fall ill, etc. Provided the reason for falling behind is legitimate, you just have to wait it out and discuss a revised repayment plan when they are in gainful employment. It’s for this reason you have to mentally prepare yourself for the capital to be only partially returned to you.
  1. For the sake of transparency, the family loan agreement should be communicated with and circulated to all family members. This way, all children know the details and processes of the arrangement entered into. Objections can be raised. Questions asked. Additional conditions considered. Estate planning issues addressed.

We all want the best for our children. Shielding them from the harsh realities of life may make us feel good, but it’s setting them up for a potential fall.

The natural inclination is to give them the money so they can buy their dream home. What parent wouldn’t feel all warm and fuzzy about helping their child in this manner?

From experience, ‘tough love’ is the better option. Try to put your emotions to one side and consider this as a business transaction. What would you expect/demand of a stranger who asked you for a loan? With this detached approach as a starting point, you can then temper the loan conditions a little to make allowance for the emotional relationship that exists.

This is where communication comes in. Both parties need to be able to sit down and rationally talk through the loan offer/request. Provided the demands by either party are not unreasonable, then an acceptable agreement could be reached. If not, then it is hoped that both parties understand it was not meant to be and life can proceed without acrimony.

And finally, resolve is required to ensure you stick with the commercial evaluation process and the subsequent decision — especially if, after due consideration, the decision is not to offer a lending hand.

Money and family is a very tricky situation…fraught with emotional obstacles…even more so when you add in-laws to the mix.

While we boomers might feel a little guilty about having had a slightly easier path into home ownership, don’t let that guilt cloud your commercial judgement.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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