The high interest rates that the RBA has adopted as a way of cooling inflation have affected the younger and older generations in families quite differently.

Many working families with home loans have felt the pressure of higher mortgage repayments. This has led to a fair amount of belt tightening, and significantly reduced discretionary spending.

At the same time, older couples who have paid off their homes, are not feeling the same kind of financial pressure. They may even be benefiting from the higher interest earnings on savings accounts, such as term deposits. This means that they potentially have more to spend.

A recent customer survey from the Commonwealth Bank shows how spending is divided by generational lines.

Source: Commonwealth Bank

According to the survey, for people under the age of 35, discretionary spending has been reduced. In contrast, discretionary spending increased for older bank customers. As you can see on the chart, people approaching retirement (55-64) increased their discretionary spending by an average of 3.7% during the June 2024 quarter. In the same period customers over the age of 65 increased discretionary spending by 4.8%.

The mortgage multiplier has doubled

If we look back to the 1980s, when many of today’s retirees were buying a home, the mortgage to income ratio was around 3 times.¹ This means that the average price of the homes couples were seeking was about three times the amount of their annual income. This made homeownership more attainable for many families.

Today, incomes are higher, but they haven’t kept pace with a housing market that has jumped ahead significantly, especially in recent years. The ratio is now around 6 or 7 times. In some areas this ratio is even higher.

This poses a major challenge for couples and families who will probably have to service mortgages for more years than their parents did. It’s a debt burden that could also reduce their ability to save and invest, and therefore impact their retirement.

Can parents help to bridge the gap?

Many parents feel compelled to support their children facing economic challenges, especially first-time buyers struggling to save for a deposit or keep up with high mortgage rates. But what’s the best way to help them? And are there any pitfalls parents need to avoid?

“This is one of the most common questions I get asked. Parents want to know what’s possible, and often they look to us, which is smart. We can help them to look at everything rationally, and we can demonstrate how different types of assistance might affect their own financial situation in retirement.”

Greg Jamieson
Senior Private Wealth Adviser

Gifting money

Gifting in Australia is generally straightforward, but there are a few important considerations:

1. Tax Implications: In Australia, gifts are not usually subject to income tax, but there can be implications for capital gains tax if the gift is an asset (like property). Additionally, if you give a significant gift, it may affect your eligibility for certain government benefits.
2. Gift Limits: There are no formal limits on how much you can gift, but large gifts may require documentation, especially for tax purposes. There can also be Centrelink implications to consider.

Lending money

Lending money to a family member can be a generous act, but it’s important to consider the potential risks and emotional consequences.

Clear communication and a written agreement outlining terms can help mitigate some of the downsides and preserve family harmony. You’ll also need to consider any taxation implications and, where applicable, how a loan may be treated from Centrelink’s viewpoint.

Co-signing the mortgage

Being a guarantor can be a noble way to support someone in your family, but it’s essential to weigh the financial implications and ensure you fully understand the responsibilities involved.

Pros:

1. Helping Loved Ones: It allows you to assist family members or friends in securing a home when they may not qualify for a mortgage on their own.
2. Access to Better Terms: A guarantor can help the borrower secure better interest rates or loan terms, as lenders see the guarantor as an added layer of security.

Cons:

1. Financial Risk: If the borrower defaults on the loan, you may be responsible for repaying the debt. This can significantly impact your finances and credit score.
2. Limited Borrowing Capacity: Being a guarantor can affect your ability to borrow in the future, as lenders may consider the guaranteed loan as part of your financial obligations.
3. Legal Responsibility: You may be liable for legal action if the borrower fails to meet their mortgage obligations, leading to potential complications in your financial situation.
4. Emotional Strain: If the borrower struggles to make payments, it can create tension in your relationship, especially if you have to step in to cover payments.
5. Potential for Asset Loss: If the mortgage goes into default and the lender pursues repayment from you, it could jeopardize your own assets or savings.

Other ways to assist a loved one to get into their own home sooner can be purchasing a property jointly, either as joint tenants or tenants in common, or by providing rent-free living to assist them to save their own deposit and reduce the burden of meeting weekly rent repayments at the same time. Both require careful consideration before jumping into.

Talk to your financial adviser

Before you do anything, it’s important to talk to your financial adviser. There can be a lot of emotion involved in decisions that affect family members. However, some of that emotion can be lessened if you have an adviser who really understands your situation and can show you the different outcomes that are possible from different options.

You don’t want to upset the family dynamic, and you don’t want to jeopardise your own retirement. So, work out what’s financially possible. Get the figures mapped out. Whether you have less (or more) capacity than you thought, it’s vital that you do your homework thoroughly and set absolute limits.

It’s only when you know exactly where you stand that you can start planning how you might communicate this with the family. Having a clear idea of how much you can help, should stop you from being impulsive or overly generous. It should also reduce any grey areas and misunderstandings that could cause frustrations in the future.

Depending on what you decide you want to do, you may also need to speak with a lawyer, accountant and lending provider to take the next step.

A financial adviser can play a crucial role in helping individuals and families navigate the complexities of financial decisions, especially in the context of rising interest rates and economic divides. Here are some key ways a financial adviser can assist:

• A financial adviser can be an invaluable resource in helping families navigate the complexities of financial support, ensuring that parents can assist their children while safeguarding their own financial future.
• By providing tailored advice, ongoing support, and a clear understanding of risks and rewards, advisers empower clients to make informed decisions in an uncertain economic landscape.

If you would like more information please call 1300 ELSTON or contact us.

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References:

1. Affordability and access to home ownership: past, present and future? Australian Housing and Urban Research Institute Sydney Research Centre https://www.ahuri.edu.au/sites/default/files/migration/documents/NRV3_Research_Paper_10.pdf