It’s natural to want your children to do well in life, and that could mean helping them onto the first rung of the property ladder. I see this with many of my clients. So what are the best ways you can give them a leg up?
1. Start a secret savings account in their name.
It doesn’t have to be totally secret but it should be an account they have no access to. The earlier you start, the better.
When my nephews and nieces were babies I opened accounts in their names and – here’s the kicker – set up Automatic Payments of $1 per week into each account. On birthdays and Christmases I added another $100. It doesn’t seem much but over the decades compound interest works its magic. The goal is to have a lump sum ready by the time they’re thinking about buying a home.
It takes a bit of discipline but if you use APs, as I suggest, you’ll never have to give it a moment’s thought. If you worry it might be used as a slush fund, simply set up the account in joint names with someone you trust, such as a grandparent. You will keep each other honest.
On a side note, I am saddened when I see young children given large sums of cash for birthdays or Christmas with no guidance on managing it. They don’t understand money so it will likely be frittered on a whim. Why not give them a bank account and teach them effective saving habits?
2. Be smart with student loans.
Student loans are totally interest-free. This tempts some young people to load up with debt on the never-never. Well-meaning parents may offer to pay off the loan on graduation. My advice is simple – don’t.
Instead, encourage them to make regular payments off their interest-free loan. While they’re doing it, you should set aside the same amount of money in an interest-earning account. After graduation you can gift them this sum as a first home deposit.
The student is still incentivised to pass exams but not to go overboard with student debt. Meanwhile you’re earning interest on their behalf, which should result in a larger sum when it’s needed for a first home.
3. Let them inherit early.
If you’ve done well in life you might want to provide your children with an ‘early inheritance.’ Instead of waiting until you pass away and leave an estate, they can access some capital now to buy a first home.
This can be a great way to help the next generation, and it’s something I see many of my Asian clients doing. They often have an inter-generational view of wealth, and the idea of ‘paying it forward’ can make all the difference.
The caveat is obvious – don’t strain your own finances. ‘Inheriting early’ should be for families that already have a significant capital base. If you’re still paying off your own home, don’t dip into the equity or load yourself up with a bigger mortgage just yet.
4. Don’t be lax – see a lawyer.
Finally, a mistake to avoid at all costs. If you decide to release capital or guarantee a loan for your son or daughter, make sure you sign a binding legal agreement. Pay a lawyer to draft something that protects your child if things go pear-shaped.
Sadly, relationships break up and bankruptcies happen. You need peace of mind that the money you provided won’t disappear into the back pocket of the soon-to-be ex.
We all want the next generation to do well. We just have to be smart about how we help them.
Want to help your kids get on the property ladder, or get onto it yourself? Get in touch.