Here is a troubling statistic: in the eight years from 2006 to 2014, the wealth of Australians aged between 65 and 74 increased by an average of $200,000. That sounds good. But the wealth of Australians aged between 25 and 34 decreased on average over the same period. (source: the Grattan Institute).
This increase was entirely due to older people being more likely to own homes – and more likely to own those homes outright (that is, with no debt) – than their younger counterparts.
Unfortunately, in many places, since 2014 the differences have simply gotten worse, as house prices continue to rise. While older people probably enjoy the fact that their wealth is increasing through no effort of their own, 80% of people are parents. This means that most older Australians have children and grandchildren who may be struggling to buy a home – and perhaps especially to buy a home near grandma and grandpa.
Of course, eventually those children and grandchildren will inherit the wealth that is currently ‘stored’ in their older relatives’ family homes. However, as people live longer, inheritances happen later in the life of the recipient. The average recipient of an inheritance is aged in their 50s. So inheriting money, unless it is from a grandparent, does not really help younger Australians enter the property market.
What’s more, there is an inherent problem with inheritances: the older person has to die before they happen! The good news is that there are things that older Australians can do to assist their younger relatives to enter or move up within the property market. Strategies include things like the following:
Buying a home in conjunction with an adult child, either as joint tenants or as tenants in common;
Guaranteeing a loan to assist an adult child to buy his or her own home;
Allowing some personal savings to be used to offset the younger generations’ debt (there are a few ways to do this, depending on what a particular lender’s processes are);
The older client simply gifting some money to the adult child; or
The older client making a ‘soft loan’ or a ‘normal loan’ to the adult child.
Each of these strategies have advantages and disadvantages. These advantages and disadvantages are too detailed for us to discuss them properly in a blog article such as this. But where an older person wishes to assist, then some combination of the above strategies can be very useful.
When selecting a strategy or strategies, what always needs to be borne in mind is what might happen in the future. An obvious thing that needs to be planned for is the younger person’s relationship ending and a division of property needing to occur. Working backwards from an event like this, it becomes very important to structure the assistance appropriately so that the family’s wealth remains as intact as possible.
If you would like to discuss how older generations can assist the next generation to purchase decent family home, please get in touch with us. Assisting young people to get started – and helping older people share their wealth with younger family members safely and intelligently – is one of the great pleasures of our work.