March 02, 2016
“I bought my first home for $30k which was a lot of money back in my day” Says every single old person when talking about property.
“The property market is in great shape and the perfect time to buy” says every real estate agent and property developer
“The property market is too expensive to even get into” Says every single young person who is renting or doesn’t have a property yet
“The property market is slowing down here in WA” says frustrated people who already own some property in WA.
Isn’t it amazing depending on where you stand in the property market, how different your opinion is?
Taking a long term view on property, it has been going on an upward trend so to all you parents out there saying “how is my son/daughter going to afford a property in 20 years’ time?” this is a legitimate worry.
But your parents and grandparents managed to do it, I am hoping you have managed to do it so I am sure with a little help, you can teach your child to do it too (with a little helping hand).
REIWA have put together this great chart:
If you also compare the wage growth over past 30 years it is like looking at the same graph.
So how will your child afford a property when they grow up as it will only get more expensive as time goes on?
Well unless you win the lotto, the most likely way will be getting a loan from a lender (bank or other lending institution).
Lenders are likely to become more conservative as time goes on with the global economy having more of an impact than ever, so this is where risk to a lender comes in.
Each lender is different with how much they will lend someone but the one thing they have always had in common is the 3 C’s.
If you can make sure your child is covered off on these 3 important items, then he/she will have a much better chance of getting into a home when the time comes.
The 3 C’s
Forgetting about all the tough policies and complex scenarios (which is why you get a broker to do all that stuff for you), it all comes down to these basic principles. Character, Collateral and Capacity.
If you teach your child from an early age to be good with their money, then this will be an easy one for him/her. Character is basically asking “if I lent you money, would you pay it back?”
How does this work? Well if your child is behind on paying their phone bill all the time, or don’t pay the water bill in the rental or rack up a credit card debt and cannot pay it back, etc.. the lender will say that you are more likely not to pay any money back that they give you. This is easily checked through a credit report, bank statements, etc… so this one sounds simple but is important to maintain.
So number one is make sure you teach your child to pay his/her bills on time.
Capacity refers to income earnt and expenses going out. If your child is on a good wage and can afford a loan, then the lender is happy.
But don’t forget the other side, if your child also has a fetish for buying up every pair of shoes he/she sees or likes to go to the casino every week to spend up big, then the lender will not be parting with any money for your child’s first home.
So teach your child from a young age about spending habits and the value of money. But more importantly, help guide your child into what he/she wants to do for a living and then teach them the value of being good at what they do. I find if you are good at something you enjoy, you will get paid more to do it.
Collateral refers to the security that the lender holds as a “just in case” if the person cannot afford to pay off the loan. In other words it is the value of the home against the loan that is borrowed.
The less the amount of loan against a property the more likely a lender will be happy to give out money to purchase it, which basically means that your child will need a sizeable deposit to get into his/her first home when the time comes.
How can you help? Well apart from teaching your child to save on their own, the best thing you can do for them is to put aside a little bit of money each week into a high interest earning account and don’t touch it until they are old enough to buy a property.
Just $20 per week into a high-interest bearing account at 5% pa from birth until they turn 20 will give them over $35,000 towards the purchase of their first home.
Compounding and automation is the key here. If you have to physically put the money somewhere each week, then you are bound for failure, so setup a direct debit into a high earning interest account and forget about it until your child is old enough. Time is the other key. If you start when they are 10 years old, that same amount each week will only total $13,458, so starting early is imperative.
So if you are truly worried about how your child will get into their first home when they are old enough and you can afford $20 per week, then start today!
If you liked this blog or know of someone else with a young child, please share this with them so they too can put their son/daughter on the path to financial freedom.
About the Blogger
Brad Dunn has been a property investor, business owner, father and working in the finance industry for over 15 years.
He is currently one of the franchise managers of the multi-award winning South Perth Mortgage Choice office but what’s really important to him is that 9 out of 10 of their clients would recommend them to a friend.
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