The term financial control generally evokes a weaker party being controlled by a stronger one. This might be in a relationship where one partner controls the finances and all financial decisions, despite the other one wanting to be involved. There’s also the instance of control where it overlaps with elder abuse. Here, a stronger party, be it physically or mentally, exerts control over an elderly person because they have designs on the elderly person’s financial resources.
While these are the most common and obvious instances of financial control, with the bank of mum and dad wielding more and more power in society and the economy, there’s another type of control starting to creep in.
With property prices losing touch with reality in many markets, some children have been leaning on their parents for a deposit, simply just to get access to the market they wouldn’t otherwise be able to crack. It’s something that might be termed a living inheritance. The parents believe they don’t need the money, with a house owned outright, and substantial assets to carry them through retirement.
The kids might ask, or the parents might offer, but both parties are willing participants. The kids want into the real estate market and the parents want to help them. All good. Now imagine a scenario where the kids don’t want into the real estate market, but the parents want them into the real estate market, and there’s a six-figure incentive on offer if they buy.
Who’d turn that down?
Imagine two kids in their early to mid-thirties. Both have partners, not homeowners, but their parents want to change that. $200,000 is on the table for each. The youngest one, a female, Jane, in her early thirties has happily taken up the offer, we don’t know anything else about her circumstances. The oldest, a male in his mid-thirties, James, isn’t interested in buying property. He and his partner happily rent an apartment near the CBD in the city where they live. They also have over half a million in a diversified portfolio they regularly contribute to.
James doesn’t want in on real estate. He and his partner are fine renting and investing the surplus (and more), while living close to their jobs and the city. He asked if the $200k could be instead added to their investment portfolio? Nope, say the parents. It’s only for buying physical real estate, preferably a house, but it will be accounted for whenever the inheritance comes down. Sis Jane will get $200k less than James from the estate.
Ponder this, the couple has made it into their mid-thirties. They have decent jobs, they have half a million bucks, so they have their heads screwed on and don’t need to be on a leash. They have designs on growing that portfolio substantially, but Ma and Pa think they should be still wielding some influence over their kid and his partner, presumably because they’re not approving of how they choose to put a roof over their heads.
What are the numbers behind their decision?
Their combined pre-tax incomes are a bit over $200k, they pay $900 a week to rent an apartment, which works out to around 30% of their combined take home income. There are no current listings with the same specs in their building, but the midpoint estimate valuation for a similar apartment comes in at $1.18 million. Add in stamp duty, and the overall cost clocks in at almost $1.25 million.
Minus the $200k gift as a deposit, it will require a mortgage of $1.05 million, but they need to add in lenders’ mortgage insurance at $15k as they don’t have a 20% deposit. Current owner-occupier principal and interest mortgage rates, according to the RBA are 6.18%, which on a 30-year term leaves them with a weekly repayment of $1501.
But that’s not all. Ownership means additional costs. The annual water in the building is $720, rates are $2,100 and body corporate fees are $7,300, which tallies to just over an extra $10k annually and takes their weekly housing costs to $1,695, which would be 57% of their combined take home income and 88% higher than their current weekly housing costs, just to live in a similar apartment with the prestige of calling themselves homeowners.
When this financial reality was explained to James’s parents, their solution was simple: sell their diversified and liquid portfolio and get into the property!
Assume they can magically exit without tax and add $500k neat to the $200k gift, leaving them with a $550k mortgage. This knocks the mortgage repayment down to $775 a week, but back up to $969 with water, rates, and body corporate. Still higher than their current rental costs of $900, but without the luxury of the diversified portfolio sitting in the background.
Regardless, James’s parents came at him from all angles with their arguments for property.
The parents say rent will go up, so they might as well buy. James points out their incomes will increase also.
The parents say the apartment will increase in value. James points out that’s also the aim of their portfolio, but appreciation in the building and the area has been quite slow, clocking in under 2.5% per annum due to the number of apartments constructed nearby over the past decade.
The parents say they should instead buy a freestanding house. James points out if they wanted to live further from the city in a freestanding house they’d already be there, and with either mortgage option it would be a substantial downgrade - either in accommodation quality, or a massive increase in travel time. Right now, James argues, the apartment owner subsidises their accommodation and lifestyle costs when the numbers are laid out.
James and his partner don’t want to buy a property just to score a $200,000 gift which then puts them in a worse position, both financially and from a lifestyle perspective. Aside from this, and most importantly, James and his partner have their own financial goals. They would have to abandon their own goals to take up the goals of his parents! Assume they achieve 7% per annum on their portfolio after fees and taxes. At their current savings rate, it’s nearing a million in five years and over $1.6 million in a decade.
After everything was laid out, James’s father then started talking about share market crashes and how a crash might affect their portfolio. James had to remind his parents they own shares and have plenty in super, unless of course his father truly believed what he was talking about and had liquidated everything to cash to avoid this crash he was talking about? Of course, he hadn’t.
A gift is a fine gesture, if it’s genuine, but it’s not really a gift if it comes with strings attached and manipulation to control the giftee’s decisions and alter their goals.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
With thanks to FYG Planners for this article