Agony Aunt: Piggy bank of mum and dad
Dear Janine,
My daughter and son-in-law recently approached me to ask if I could help with the deposit on their first home. They have saved $5000 but need another $25,000 to get on the property ladder. My wife and I have both just retired, but do a little bit of part-time work. We have $150,000 in savings for our retirement and our four children are aware of this. It probably seems like we have plenty of money to help our daughter, but it doesn't really feel like it. I'm a bit concerned those savings need to last us up to 20 years or more. On the other hand, we're also aware of how difficult it is for this generation to afford a house. If we do decide to give them the money, we are not sure if we should ask for it to be repaid? What are your views on this situation? Savings or Loans.
ANSWER:
To be honest, I run hot and cold on this one. There are millionaires who wouldn't give a cent to their adult children and there are those who would hand over their last few thousand dollars. Both decisions are made based on emotions, strength of character and the long-term good of their children, not on whether they are generous or miserable parents.
In the ideal world, life would be a whole lot easier if adult kids came equipped with a money- morals filtration system. It would work something like this:
"I will not approach my parents for any cash until the following questions have been considered":
Maths test No 1: Multiply the requested cash by the number of siblings. Example; $25,000 house deposit multiplied by four siblings equals $100,000. Does this alter my perception, if we were all treated equally? Warning siren: do not approach the Bank of Mum and Dad.
"Poor me" test: My brothers and sisters have more than me so they won't be asking for money. Warning siren: they earned it. They may have children and an equal payout could assist them with education or something just as worthy in your parents' eyes.
Maths test No 2: Take the age of 90, minus your parents current age (90 minus 65 equals 25 years in retirement). Take your parents savings, for example $150,000 and divide by 25. This gives $6000 a year. Add this to the superannuation for a married couple of roughly $28,000. That's $34,000 a year for two people. We are ignoring interest earned, of roughly $4500, (and falling each year as they use their capital) but we are also ignoring erosion via inflation. Is your own household income higher? Embarrassment warning siren: do not approach the Bank of Mum and Dad.
In-laws have offered us money: Quick reality check. Did they "offer" or were they assisted by ever-so-subtle hints of poverty. Regardless, subtle coercion or the size of their wealth is utterly irrelevant to your own parents. Warning siren: do not use guilt when approaching the Bank of Mum and Dad. And do not reveal what another parental bank is intending to do.
Let the banks make individual choices and do not judge any differing outcomes.
Maths test No 3: Am I over the age of 35? Oh for goodness sake, aren't you old enough to hear the siren?
Debt: Do I have any debt in the form of hire purchase, loans or stagnant credit card balances? Whoops, pay them off before approaching the Bank of Mum and Dad.
Holidays: Been overseas? Quick ski in Queenstown? Warning siren: do not approach the Bank of Mum and Dad.
Gadgets: Do we own an iPad, iPod, Mac, iPhone, Xbox, Wii, 3-D telly, or 4x4 car (anything with a lot of 'i's or 'x's or numbers in it?). Warning siren: you have a "choice" problem, not a money problem. Do not approach the Bank of Mum and Dad.
Income: Am I working full- time? Have I applied for a promotion, a higher paid job, overtime or extra qualifications? If not, warning siren: do not approach the Bank of Mum and Dad.
Expenses: Have we been buying new appliances, branded clothes, going out drinking, smoking, or purchasing a car larger than a Toyota Yaris? Warning siren: do not approach the Bank of Mum and Dad.
Maths test No 4: Parents over 80? Loud siren: you can wait.
Repayments: Do a budget and prove to your parents whether repayments are possible. Be clear about whether you need a loan or a gift. Don't wing it to see what you get away with. This is an adult-to-adult conversation.
This type of basic filtration system would weed out the bugs and divert or delay quite a number of requests for money.
When giving a large amount, don't feel afraid to ask for involvement in the solutions.
You should be able to visit a mortgage broker and ensure they have looked at the lowest deposit offers from banks. Have they sought banks that take a guarantee for the deposit (leaving the money in your bank account)? I'm not suggesting you guarantee the whole mortgage, only the deposit component, as it may be an alternative to handing over the cash.
Also, don't be afraid to discuss their incomes and their rate of monthly savings. They are asking you to sacrifice yours, so transparency is not a privilege.
If you decide only one child will receive money, most parents will alter their wills to reflect this.
However, let me point out one hiccup. If one child has $25,000 now, it is not financially equal to remove $25,000 from their inheritance. You may live another 10 years or another 30 years. If the other children had the same gift, they would have saved the interest on their own mortgages for a substantial period of time. Or they would benefit from the capital gains, as their sibling will do.
If you want to play it fair, get your lawyer to add a clause in your will that will adjust the original amount by historical mortgage rates or a house price index that adjusts for capital gains.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.