This article comes from a webinar that was run on Monday 19th March 2018 by Gavin Martin from Cornerstone Wealth. Disclaimer: The content of this article includes advice that is general in nature and does not consider your personal situation. Christian Super encourages all people considering their options in retirement planning to seek out qualified professionals who can provide specific personal advice.
Property is all about Location Location Location but if you are seeking to break into the residential property market in Melbourne or Sydney you are likely to wish you were looking elsewhere. Whilst the end of the mining boom has taken the pressure off house prices in other states, record low interest rates, foreign investors and property speculators have continued to put upward pressure on prices in Melbourne and Sydney.
So if you are trying to break into the residential property market, or you would like to help your kids to, what are your options?
1. Buy in a cheaper location or lower cost type of property – if you can’t afford to buy in your desired location you can consider buying further out from the major city centres, choose a cheaper suburb or a smaller more cost effective property.
2. Rent long term – whilst it can be seen as giving up it is a real option to rent and build up other assets; super, business, shares or even other property (see the next option).
3. Rentvest – this is where you rent a property to live in (often in a location you could not afford to buy) and buy an affordable property elsewhere. This strategy is becoming increasingly popular as it enables you to live in the location of your choice whilst building equity using the benefits of tax deductible mortgage payments, negative gearing and flexibility. It is a bonus if you can live in the property when you first purchase it as it can then be considered your primary place of residence and maintain its capital gains tax free status for up to 6 years of renting it out.
4. Buy in your super fund (SMSF) – another option is to buy a property in your own super fund. You can use some of your existing super balance as a deposit and borrow the remaining funds to complete the purchase. The downside is that you cannot live in it and neither can any of your friends or relatives, the set up and ongoing costs are significant, you need to comply with the superannuation rules that are restrictive and if you eventually choose to live in the property you have to transfer it out of the super fund and incur the stamp duty cost.
What about parents – how can you help?
Many parents I meet acknowledge the difficulty for young people to break into the property market and are keen to help but not sure of the best way to do so. Here are the main options and the implications of each.
Loan Money to your Kids
This is the least desirable option from both my anecdotal experience and biblical principles. When you loan or lend money you set up a borrower / servant relationship (Prov 22:7) which can strain relationships. The last thing you want is your good intentions to damage your relationship with family members. One financial commenter coined the phrase “Christmas dinner tastes different when you owe money to your folks”. It is not to say it doesn’t work, I have seen it work on many occasions but it can put family relationships under strain.
Go Guarantor for your kids lending
Going guarantor is agreeing to step in to meet your child’s lending obligations should they not be capable of doing so. Going guarantor is a common method to achieve two things:
1. Obtain lending – if you or your kids don’t have a sufficient deposit, ongoing income or cannot satisfy other borrowing requirements, the lender will require a third party to guarantee the loan. The guarantor is responsible to meet the mortgage repayments should the borrower default. An asset such as the parents home is often used as security.
2. Avoid mortgage insurance – where the borrower doesn’t have a sufficient deposit (usually 20% of the property value plus stamp duty) a guarantor can provide a limited guarantee to avoid the need to pay mortgage insurance which can add up to thousands or tens of thousands in a once off payment.
I do however believe that this approach is not advisable. The Bible advises in Proverbs 22:25 not to put up security and if you have free yourself from it as soon as possible (Proverbs 6). Because of these warning I do not encourage going guarantor for family or non family members.
Gift funds to your kids
Of the 3 options to assist your kids achieve home ownership, the least risky approach is simply gifting the funds with no strings attached. It is important to transfer knowledge (good financial management) before transferring wealth because more money amplifies existing behaviours.
There are many ways to gift funds; provide a deposit, match or multiply the deposit your kids have saved, gift a property you currently own (tax and stamp duty should be considered), allow them to live at home to save. Prayerfully consider what would work best for you and your family.
Regardless of the gifting approach taken, doing it with no strings attached is important. The decision to provide funds “no strings attached” will need to made over and over. When you gift funds and then the person you gift funds to makes financial decisions that don’t make sense to you, you will need to remind yourself to let go each time you think feel concerned or frustrated with their decisions.
If you receive Centrelink benefits or will be eligible in the next 5 years for a benefit it is also important to consider deprivation rules. This is where Centrelink assume you still hold the asset for 5 years after gifting it which could negatively impact your Centrelink entitlements.
First Home Saver Super Scheme
The Federal Government has announced a new scheme to help first home buyers save for a deposit to buy their first home. This time the scheme will be managed through the superannuation system. Whilst it is a little complex in it’s structure and has a few traps it can boost your deposit by $6,000 over two or three years via the tax savings available.
Funds could be gifted to be deposited into super to save tax and boost the home deposit. The scheme presents another option for those eligible.
The real key to breaking into the property market is to spend less than you earn, save at least a 20% deposit (plus stamp duty) to avoid mortgage insurance and buy when it is right for your situation. Don’t get caught up in the hype the media evokes with property market cycles. Only take on as much debt as your household can conservatively handle and pay it off as quickly as possible.