It is hard to feel confident in your financial future with the cost of living continuing to rise. Many parents are also concerned that their kids won’t be able to buy a home or have enough to fall back on if economic conditions get tougher.
The Bank of Mum and Dad has stepped in to help thousands of Australians get their home deposit over the line, but for most families, handing over a large chunk of savings isn’t possible, especially in an uncertain economy.
Here are a few ways you could help your adult children get ahead without hurting your chances of a comfortable retirement.
Acting as guarantor
There are ways to help your kids buy a property that doesn’t involve giving up the savings that you’re relying on. One option is to become a guarantor and using the equity in your home as security for your child’s loan. If you are a guarantor on their loan, it means that you have agreed to take on the responsibility of repaying the loan if your child, the primary borrower, is unable to fulfil their loan obligations.
While this might seem preferable to parting with cash savings, there are a number of risks you’ll need to take into account. One of the main ones is that if your child is unable to service their mortgage, you’ll be on the hook for the amount you guaranteed. To minimise this risk, make sure you ask to be released from the guarantor arrangement once there is sufficient equity and your security is no longer needed.
Put money in your child’s offset account
If your child already has a mortgage, one way you could make their life easier is by considering keeping a portion of your savings in their offset account. Every dollar held in one of these reduces the balance on which interest is charged, so by topping up your child’s offset account you could help them save money and potentially shorten the life of their loan.
The main downside is you’ll lose out on any interest you could have earned by investing that money or keeping it in a savings account or term deposit. The control of the funds are also lost, meaning your child could spend the money without you knowing. You’ll also need to have clear guidelines around how accessible your money will be, how long this arrangement will be in place and potentially an agreement drawn up with a Solicitor to ensure that they don’t view the funds as their own.
Loaning money instead of gifting it
You might want to consider supporting your children by lending them money instead of gifting it. This is especially the case if you receive the Age Pension since you’ll face limits on how much money you can gift without your pension payments being affected.
To help prevent any misunderstandings and safeguard your retirement savings in case of any disputes, it’s a good idea to have a Deed of Loan drawn up by a solicitor. This should spell out the amount, term, and purpose of the loan, along with whether or not any security has been provided. Without a written agreement in place, the loan might be presumed to be a gift and you could find that you’ll have a hard time retrieving it should matters go to Family Court.
Provide a home while they save
Rising rents mean that it is even harder for young Australians to purchase a home of their own. If you own your home outright and have enough space, inviting your kids to move back home can be just what they need to get their finances on track. Eliminating that expense for just a year can put thousands of dollars back in your kid’s pocket, and make other expenses such as groceries much more manageable.
Before you let them return to the nest, make sure to establish clear boundaries and expectations. Whether or not they will be chipping in for groceries and utilities, doing chores, or paying a small amount of rent should be discussed upfront to minimise any conflicts down the track. It might also be helpful if you both decide on a move-out date which could provide that extra little bit of motivation for them to improve their financial situation.
Encourage savvy financial habits
Lastly, one of the best things you can do for your kids is to help them see the value of budgeting, saving, and investing. Investing in particular can be one of the most consequential things you can do. The sooner your kids understand this, the sooner they might be able to reap the benefits of compound interest and build their wealth.
As always, consider seeking professional financial advice before implementing any of these ideas. While both you and your kids deserve to be financially comfortable, you don’t want to introduce too much stress into your life, especially if the solution doesn’t match your objectives, financial situation and needs.
Learn more about APS Financial Planning
Written by APS Financial Planner, Timothy Foster
Timothy joined the APS Benefits Group in 2006 and launched the APS Financial Planning department. He is an experienced and respected financial planner who is committed to focusing on client needs and assisting them to maximise their financial assets. Timothy is well known for his simple and straightforward strategies designed to benefit his client’s future.
Timothy Foster’s qualifications include Certified Financial Planning (CFP), Life Risk Specialist (LRS) & Advanced Diploma of Financial Services (Financial Planning), with over 25 years experience in Financial Planning, Banking and Accounting, both within Australia and overseas. He has extensive experience in Government Superannuation funds, putting him in demand to speak at seminars and departments.
Outside of being a passionate Financial Planner, Timothy is a proud dad of two young children and loves travelling, be it outback Australia or just around the corner!