Property is one of the most stable investments on the market. It is also a very expensive one, but it could pay off in the long run and earn you significant capital gains.
NAB research from April 2015 suggests that 6.7 per cent of first-home buyers have family support – up from 4.8 per cent in 2010. And there is a reason this method of getting onto the property ladder has become more popular – prices have gone up.
Why are value increases making it harder to buy property?
The median dwelling value in Sydney has shot up to $1,008,590.
According to the CoreLogic RP Data monthly indices to July 31, 2016, the median dwelling value in Sydney has shot up to $1,008,590, Melbourne is a close second at $812,170, and even Hobart has dramatically increased to $360,860. Those values have increased over the past 12 months by 9.07 per cent, 7.47 per cent and 6.21 per cent respectively. As house and unit values continue to rise, buyers need larger deposits.
The Australian Securities and Investments Commission's Money Smart mortgage calculator shows how much a person can afford to borrow. For a $500,000 mortgage, over a period of 25 years, at a fixed rate of 4.50 per cent, monthly repayments equate to $2,789. The total amount of interest on that particular mortgage is $336,749.
In order to get into the same property your children would purchase with that loan, but to pay less interest, or less each month in repayments, the initial deposit must be larger. If the mortgage was only $400,000 (that is, parents added $100,000 to the deposit total), then monthly repayments would only come to $2,233. The total interest on this lesser mortgage is then only $269,999. That's a significant saving over the long term, and it could set your family up for life. To
help your children get started in real estate, helping with their finances would be the most valuable aid they could ask for.
To find the best possible property for your family's investment needs, the team at the REIN Group can help.
Why are parents helping children more and more?
One of the most popular ways that parents can help their families buy into property is by putting their own homes up as security. This allows for a smaller initial deposit, and doesn't take money out of the parents' pockets in the immediate future either.
"It is getting a lot tougher for first-home buyers to enter the market," said NAB Executive GM of Consumer Lending Angus Gilfillan to the Sydney Morning Herald in an April 2015 article.
"The rise in house prices has been pretty well-documented, particularly in Melbourne and Sydney, where prices have increased by [around] 50 per cent since 2008. All of this means that first-home buyers need a larger deposit and we're seeing that [they] are, effectively, being crowded out of the market."
Some people cannot afford to keep saving for a deposit as the value of homes also goes up.
That is, they are being crowded out without assistance, because they cannot afford to keep saving for a deposit as the value of homes also goes up. In some cases, it might be that over a year, the median dwelling value in a particular suburb has increased more than what a young couple has been able to save. If that scenario continues to play out, then they will never have enough saved for a deposit, and will have to continue renting.
However, with the assistance of parents, who have equity in their properties already, deposits can be smaller. Parents want their children to be financially stable as soon as possible, and waiting and waiting for them to buy their own piece of property isn't helping achieve that. So, they step in with their existing security, and younger people are able to buy an investment property of their own.
From that starting point, they can build their portfolio rapidly, using the equity from the first investment (the one the parents helped to buy) as security on their second mortgage, and so on. At the REIN Group, we help you to identify growth markets, so your investments, or those of your children, will show sound returns in the future. That is what building a property portfolio is all about.
How can parents encourage children to invest in property?
One of the best ways to show your loved ones the importance of financial stability is to let them go out on their own and pay rent for a couple of years. They might notice their weekly expenditure spike, because of rental payments, and it could frighten them into realising how necessary it is to one day own their own home, mortgage-free.
One of the best ways to achieve this is with a solid investment portfolio, with properties that are always tenanted and will grow in value every year. To learn more about how to achieve this, or how you can help your children to, contact the REIN Group today.