The rising cost of living coupled with the current state of the housing market poses a significant obstacle for young individuals aspiring to purchase their first homes.
After a rapid increase in house prices in recent years, the market did soften with prices coming back. However, the long-term trend shows prices continue to increase.
Data from the Reserve Bank of New Zealand shows that from December 1990 to June 2023, the average year-on-year growth in house prices has been 5.9 percent. When you compare that to the growth of incomes, Statistics New Zealand data shows the average annual wage growth is 2.14 percent, using data from 1993 to 2023.
As it gets challenging for first home buyers to get on the property ladder, more parents and guardians want to support their adult children to become homeowners. While putting a large sum of money towards a property is a massive commitment, here are some practical and beneficial strategies parents can adopt to make the dream of home ownership more achievable for their children.
Offer financial support
If parents have some extra funds, they can consider lending the deposit to their children on a commercial basis. Alternatively, if there's equity in the parents' home, establishing a line of credit facility allows them to lend the deposit. In both cases, it's crucial to formalise the arrangement with a loan agreement registered with the appropriate authorities.
Provide personal guarantees
Parents can show faith in their children by offering property or other assets as security through personal guarantees to the lender. This may be limited to the amount of the deposit, but it involves some risk. Seeking legal and financial advice is highly recommended before proceeding.
Joint venture
A property co-ownership or joint venture arrangement, such as 'Tenants in Common,' could be considered. Parents can contribute cash for a percentage of the property, allowing their child to use it as security to buy their share. Clear rental agreements should be established, and legal advice sought to ensure a well-managed arrangement. Tenants in Common is always a way friends and siblings can join together to purchase a property, so if you have more than one child to get on the property ladder, this could be an option for multiple adults to go in together on the same property.
Education - the earlier, the better
Encourage children to enhance their property know-how and financial literacy skills. Attending seminars on money management and property can be beneficial. Teaching children about money management early on can help them build the deposit for their first property more effectively.
Encourage children to become “RENTVESTORS™ and think nationwide
Big cities may have areas that are too expensive for first home buyers, so they may not be able to buy where they would like to live. Encourage the concept of 'Rentvesting,' where individuals act as landlords on an investment property while renting elsewhere. This way they can buy where they can avoid and rent where they want to live. They will be able to build up equity in the rental property while using the rental income to contribute towards mortgage repayments.
This strategy may require funding shortfalls initially, so financial planning is essential.
Take advantage of the First Home Grant
The government has a programme designed to help first home buyers with their deposits. The First Home Buyer Grant can provide up to $10,000 towards a first home. There are income and property requirements, which will determine if you qualify for this support and how much you could receive.
Match their savings
Supporting your children's savings efforts by matching their contributions can significantly aid their journey to homeownership. This could involve contributing two dollars for every dollar they save, making it easier for them to accumulate a deposit. By saving $1,000, your contribution of $2,000 can help them reach a $100,000 deposit with just $33,000 of their own savings, making their goal of homeownership more attainable.
Although it may still present a significant challenge, every small contribution can make a difference. By doing so, you are helping them inch closer to their goals without diminishing their dedication and accomplishments. Moreover, this approach serves as an excellent opportunity to cultivate positive money-saving habits and foster a sense of financial independence.
Provide rent-free living
Offering rent-free living to adult children still residing at home can ease their financial burden. Instead of charging rent, parents can encourage them to contribute by assisting with housework and maintaining a clean household. In addition to lightening your load, this arrangement enables them to redirect those funds that would typically be paid in rent towards their own future home.
While the challenges in the housing market persist, these strategies can offer meaningful assistance to young individuals pursuing their dream of owning a home, bringing them closer to their goals without diminishing their hard work and achievements.
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