The bank of mums and dads has been a reliable lender to many first time buyers trying to get that extra bit of assistance to enter the market. But considering strong growth in recent years it’s not uncommon for parents to gift their children tens of thousands of dollars to help build a deposit.
A leading national mortgage brokerage released figures from a February survey which revealed that 19 per cent of first home buyers are gifted an average of $41,000 by their parents to secure their first home. Gifting this amount of money can put mums and dads under significant financial strain, especially as they near retirement.
Any parent would be happy to help their children buy a home and take one of life’s biggest steps, but they need to carefully consider how their money is spent, both for their sake and their children’s.
By definition, first home buyers have no experience buying a home. They are learning about the process each step of the way and are at risk of making serious mistakes, often not realising until it is too late.
Nowhere is the risk of making mistakes greater than when it comes down to submitting an offer or negotiating the sale. This should be a serious concern for mums and dads gifting tens of thousands of dollars to their children to buy a property. Inexperienced buyers being matched against professional selling agents will always come off second best.
Imagine if you were a parent gifting your child $40,000. Would you be confident they know how to get the best result with your money?
Would they know what to do if the property passes in to them at auction? Would they know what questions to ask the Selling Agent in order to formulate an offer?
For example: a first time buyer is pre-approved up to $560,000. They are bidding for a property listed for $500,000 that passes in to them at $470,000. The selling agent tells the buyer they need at least $540,000. What’s the buyer’s first move? Do they know?
Or would first time buyers know how to formulate an offer that’s attractive to the vendor but doesn’t over pay? Or would they know what conditions to put on their offer?
If the answer to any of those questions is a ‘no’ the buyer could be in serious trouble of overpaying for the property.
Buying the right property for the right price gives first home buyers the best chance of building their wealth and setting themselves up in life. It also helps their parents.
A first home is rarely a dream home; it is really a stepping stone. First home buyers will usually buy an apartment or townhouse to live in for a few years, hope that it increases in value and then use the equity to purchase their family home.
This plan relies on buying a good property that has the best chance of achieving strong capital growth over time. There’s a lot riding on that little apartment or townhouse, not just for the buyer but for their parents as well.
In an ideal world, mums and dads could give their children a financial helping hand and then recover the money when the property is sold. If their kids buy a good property that grows in value, the bank of mum and dad might get a nice return. Nearing or in retirement it is a significant decision to gift tens of thousands of dollars, so why not buy something that is going to get that money back?
Again the question should be asked: would you trust someone who’s never bought a home before to know what to look for in a good quality property?
This isn’t to suggest mums and dads shouldn’t give their children financial help. Any parent wants to see their child do well in life. But mums and dads need to think about how their money is spent. They need to make sure their children buy smart.
That’s why they need to engage a Buyer’s Agent.
A Buyer’s Agent will know how to negotiate to secure a property for the lowest price. They will know what to do when the property passes in, or how to formulate an attractive offer.
They will also know what to look for in a quality property, giving buyers the best chance of purchasing something that grows in value.
There is so much at stake when buying a first home. A gift from the bank of mum and dad to help their kids buy only increases the need to get an expert to take care of the process for them.
So why not consider lending that little bit extra to your children and have the peace of mind they have an experienced professional in their corner committed to getting them the best result?
For more tips check out other ways you can help your kids get onto the property ladder and advice for first home buyers.