Research shows 86 per cent of parents are providing financial support to their adult children. It’s not always nickel and dime stuff either. Mortgage broking group MoneyQuest, for instance, say one in five first home buyers nationally rely on a cash gift from their parents, with the average handout being $41,000.
As it turns out, first home buyers aren’t the only ones receiving a financial helping hand from parents. A study by the University of Adelaide found Australians aged over 50 collectively give $22 billion annually to family members, usually their grown-up children.
If your children are taking a sensible approach to money – and you have the funds available – it’s only natural to want to help out. But there is a fair bit of thought needed here.
We have three adult kids, and like many readers, we have - with great pleasure, been able to provide a loving home environment and a good education. Those things, love, support and education are the keys for us. Any other support is just a bonus!
However, there is every chance both of us, or either my wife or I, will live to our late 80s and even 90s. So provided our own retirement plans are secure, it seems to us that providing a helping hand, in particular when it comes to owning a home, makes a fair bit of sense. We don’t see much point in leaving money to 60-year old kids if we have long lives.
These goals are not incompatible. Like many pre-retirees, we hold some low risk cash investments earning around 2.5%. So why not lend some of these, with legal documentation secured against property, to our kids at a similar rate?
Equally, if you have a child with a mortgage at say 5%, why not draw up a legal agreement to loan your money into their offset account? I know your kids would be delighted to pay you the 2.5% you would normally get. Or you could split the savings and call it 3.75%. The kids are 1.25% better off and so are you. Sure, the bank misses out, but that’s not your problem.
So, with longer life, I favour earlier distribution of what will one day be the kids’ money, providing of course they are responsible. In most circumstances I do not see why this needs be to your detriment. Get everything legally documented and both you and your kids benefit.
Most importantly though, be sure to have your own finances in order before opening the purse strings for your grown-up kids.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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