How much should I save for my children before they move out?
It can be a bit of a touchy subject for a lot of people. The fact of the matter is, a lot of parents will want their children to find their own way financially. However a recent survey conducted by RaboDirect has suggested that in each State of Australia, 60% of Australians would want to help their children buy their first home. Ultimately this raises the question, how much should I be saving for my children?
Even that question can be a bit up in the air. A lot of people based in Sydney assume that house prices are similar all across Australia to their local area, but it simply isn’t the case. The median house price in Sydney is $1,000,616, which is a pretty hefty sum. In Melbourne the median price is $668,030, a much more reasonable amount, and even more reasonable in Brisbane at $490,855.
For the purpose of ease, let’s say that you live in Sydney and want to help purchase property in Sydney for one child. A lot of parents just want to be able to secure a deposit on a home for their children. Banks require 5% minimum, meaning $50,000 is needed to be able to be considered for a mortgage on a million dollar home. While this is an achievable amount of money for many, it is still very difficult to reach. Adding to this, any amount amassed under 20% will incur mortgage insurance, which can add another $20,000!
So the dream would be to avoid that $20,000 penalty, and have over 20% of the full price of the home. So if we go back to our median point, a million dollar home, $200,000 would be needed at the least to avoid Mortgage Insurance and secure a home. Virtually no first home buyer has that kind of money, meaning that it can fall back to parents to pick up the slack.
If we go off of the assumption that a first home buyer has amassed $50,000, then $150,000 would be needed in addition!
So clearly, if you want to support a first home buyer you need a significant sum of money. If you own a home or have super, you can use that as equity to secure a mortgage for them, but this method is a lot less tangible than being able to hand over a lump sum of money and there are more steps involved with that process.
Put simply the solution is to have a large sum of money that can be used to help purchase a property. Many invest in shares, some in bonds, almost all in the banks, but at the end of the day the biggest and safest returns are in property.
The concept of leverage is a good way to describe how this process goes. You purchase one home and live in it for (let’s say) 10 years. During this time the value of the home goes up by $100,000. That 100,000 can be used as a deposit on a second home, which is then rented out. So now you have two properties, with rental income, inflation and capital growth building the value of your investment over time. From this point you can either keep leveraging yourself into new property investments or you can hold the ones that you have and sell them when the market peaks.
Any way you look at it, the property market is a pretty simple way to build up your personal wealth, allowing you the luxury of supporting your children when the time comes for them to move out, as well as supporting yourself during retirement.
We urge you to look at the alternatives and then have a chat to us about what property can do to help your financial future!
CEO McCarthy Group