- Wealth Management
Tempted to help your kids into the property market?
Home ownership is stubbornly out of reach for many young Australians, who are increasingly turning to the 'Bank of Mum and Dad' to get a foot on the property ladder.
Some parents are stepping in as guarantor for a loan or providing a lump sum for a deposit, while others are getting more hands-on and co-buying property (usually with the child taking up residence and paying rent).
It's admirable that so many parents are willing and able to give their offspring a helping hand, however it is also concerning as many may be unaware that they could be putting their retirement in jeopardy if they don’t have an adequate safety net in place.
Consider what would happen, for instance, if your child was injured or struck down by illness and couldn't keep up with their mortgage repayments? Who would pay the loan?
Or what if you were guarantor and your child over commits, or interest rates start to rise and they can no longer afford to make repayments? Could you afford to assume responsibility for the loan?
Stuart Peffer, Citi's Head of Insurance, says it's important that parents protect themselves financially so that if the worst should happen they have some security in retirement.
"It's one thing for parents to provide a deposit or be guarantor, but it's another thing altogether to fund a mortgage for another 25 years if things did go pear shaped," he said.
"Income protection is a simple and cost effective safety net for young homebuyers, even if parents have to pay the premiums. It provides peace of mind for parents knowing they won't have a mortgage millstone around their neck in retirement."
While many young people think they are bullet proof and won't need insurance, the harsh reality is bad things can, and do, happen - often when they least expect it.
That's why young adults need protection against financial risk as much as anyone.
In fact, the 2000 Interim reports of the Disability Committee paints a sobering picture that is cause for concern for anyone with long-term financial commitments, like a mortgage.
It suggests that every working Australian has a one-in-three chance of becoming disabled and out of work for more than three months before they reach retirement.
It's admirable that so many parents are willing and able to give their offspring a helping hand, however it is also concerning as many may be unaware that they could be putting their retirement in jeopardy.
"Let's face it, taking out insurance to reduce the financial impact of sickness, accident or death can be significantly cheaper than having to pay out your child's mortgage when you've already retired," Mr Peffer highlights.
A policy combining Death, TPD and Income Protection can cost as little as $124 a month for a 35 year old with a $500,000 mortgage.
The Total and Permanent Disability (TPD) Cover, generally combined with Death Cover will pay a lump sum in the event the child is permanently disabled and unable to work again.
Income protection can replace up to 75 percent of a person's income in the event they are unable to work due to illness or injury - depending on the policy provisions. What's more the income protection premiums are tax deductible, making it even more affordable.
While it's understandable why parents would want to give their offspring a helping hand in today's competitive property market, Mr Peffer said it's crucial they weigh up the benefits as well as the potential pitfalls.
It's a good idea to seek expert financial and legal advice so you fully understand the risks and benefits before putting your hand in your pocket.
Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. You should consider if this advice is appropriate for your situation. We recommend you read the Product Disclosure Statement (PDS) or Terms and Conditions, available online or via a Citibank branch, in addition to seeking independent legal, financial and taxation advice on your personal circumstances before acting on the information contained in this material.
This material is for general information only. All opinions are subject to change without notice. This material is taken from sources which are believed to be accurate, however Citibank accepts no liability of any kind to any person who relies on the information in it.
Investments are not deposits or other obligations of, guaranteed, or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risks, including the possible loss of the principal amount invested. Investments are subject to risk, including loss of income and principal. Past performance is not an indicator of future performance. Due to exchange rate fluctuations, you risk losing capital if you invest in foreign currency. Some products are not available to US persons and may not be available in all jurisdictions.