Today’s generation experience a lot of financial struggles: from the lack of steady employment opportunities to the irrational economic climate. But one of the issues young Australian families struggle most with is the current state of the housing market. With the rising cost of owning a property, parents lending money to their children is fast becoming a big trend.
Before taking the big plunge to loaning a hefty amount to your children, consider asking these questions. You want to make sure that you are actually helping your children and not setting them up for financial trouble.
Are you doing the right thing by loaning the money or doing them a disservice unintentionally?
Parents want to do right by their children. They are constantly thinking of ways to help them in any which way or form. But before making a big decision, be sure to reflect and be positive that you are doing this for all the right reasons, no matter the future implications and challenges. As a parent, you have to make sure your children are responsible and are in the right state of their life to be able to afford and pay you back. This will teach them to paddle through the financial challenges and not rely on Mum or Dad as their “Free out of Jail” card.
2. Can you afford it?
Yes, you have a 150,000 dollars saved up and all ready to loan to your child. But are you sure you can afford lending your entire savings and be confident your children can actually pay you back? It is important to assess if you’ve got the capacity to help your kids and the loan doesn’t unwind any of your own financial planning. Protect yourself first before doing anyone else a favor.
3. Can they afford it?
Have your own lending metrics in granting a loan to your children. These people are your family; you know more about them than the banks will ever do. You have a strong sense of who they are, where they are in life and career, their lifestyle, their current mindset, and future expectations and plans. From this assessment, you’ll have an idea if your children can afford it. It is also up to you to decide on how much you think your child can actually afford.
4. What are your plans for the future?
If you over-commit yourself financially without taking a look into the future, you can really cause yourself some trouble down the line. If you dream of owning your country farm or travelling through your 60s, you should consider all these before making major financial decisions. Also, we should always be prepared of what tomorrow may hold. There may be a major investment opportunity or even a sickness in the family. Either way, you should have a buffer for every twists and turns of life.
5. Do your children have a budget?
Having a budget can be indicative of how responsible your children are when it comes to finances. Owning a house doesn’t stop from buying it, that’s the easy part. There’s also the furnishings, tax, maintenance, etc. If they are aware of their responsibilities and have set aside a budget for their payments and keep a buffer for miscellaneous expenses, you can very well be confident that they are up to the challenge of taking on this financial accountability. Also, if they are transparent with their finances and they allow you to document the loan, this will add to your personal peace of mind. It is very easy to ask for money, but the responsibility of paying back and being proactive about it is the hard part of the job.
6. Should the assistance be via Gift or Loan?
Never give the money - Always have it as a loan
Even if you don’t intent to ever have the money returned, gifting is a bad idea.
If a loan is documented and secured against the property - this has the effect of protecting the asset in the event of your child separating or facing financial misfortune.
As an example - gifted money to your child & their spouse to buy a house can be problematic if they get divorced. You may have effectively just given away half the money to your ex son in law. Documenting it as a loan means that in the event of separation , this, just like a bank loan, shows as a liability & helps to keep the money in the family.
7. Have you documented everything in case of unexpected variables? Get this done as a condition of the loan!
There are a lot of factors to consider before handing over a hefty amount of cash. How do you document the loan? Is the loan secured against the property? In the event of separation or divorce of your child, is your child financially protected? What happens if your child falls Ill and can't work? Do they have an insurance policy? Do all parties have a valid will? Seek help and avoid making emotional decisions. This simple step will prevent irreversible mistakes and help you protect yourself, your family and your children.
All these questions and the intricacies of loans are areas that we help our clients with. Speak with us and we can ensure you are talking with the right experts to ensure that everyone is protected and you can enjoy what should be a happy time for the family.
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