Sourcing Downpayment From Family? Here Are Some Tips For You
Most young working professionals today have the repayment capacity, thanks to the equated-monthly-installment (EMI) schemes. However, the same cannot be said about their saving capabilities. For such professionals, buying a home is not the top priority when they are in their 20s. This is the age when they invest in gadgets, travelling and exploring, gifting, socialising, among others. By late 20s and early 30s, property purchase become a crucial discussion within families and both professionals and their parents realise the importance of having a home of one's own. However, if you haven't saved enough, where is the help going to come from? For a majority of Indian youngsters, early in their professional lives, the initial downpayment comes from their parents. Now, this could be a gift or a loan – both help. If you thought this is a phenomenon that Indians alone take to, you are wrong.
Here are some numbers that prove otherwise:
*As per a recent research confucted in the United Kingdom, the average British parent would monetarily assist their children till they attain the age of 31.
*As per an analysis by Transition To Adulthood Study, undertaken for the New York Times, 40 per cent of youngsters in their early 20s get financial help from parents to cover rent which is about $3,000 per year.
*According to a survey by National Association of Realtors (NAR) in 2014, one-third of first time home buyers got some assistance from relatives and friends, 27 per cent got a gift and seven per cent got a loan.
*An online poll by Forbes Woman and the National Endowment For Financial Education says that 50 per cent of financial assistance provided by American parents is for housing and seven per cent of their gifts/loan/assistance is for downpayment for a home.
While depending on parents and relatives, youngsters and parents should keep somethings in their mind. Here are some tips:
*Use your parents' money judiciously: Money from parents is the easiest to get your hands on and is unregulated too. While it may be of great help when used judiciously, do not let this weaken your financial stronghold. Sometimes, financial assistance from family can make you very dependent and treat it as a last resort for everything. Manage your money well. Parents, on the other hand, should understand that most of the times, such lending is often unsecured and there are risks associated if you are expecting the money back.
*If it's a loan, go the legal way: Why should one take one's parents lightly? After all, they have spent years saving that money and when they give it to you, they lose out on not just the money but the interest amount they could have otherwise got. A promissory note or a detailed loan agreement could be of help. Promissory notes may have simple terms and conditions but could ask you return the loan on demand. If parents wish to make a detailed list of terms and conditions, the latter might help. Parents should avoid being emotional about loaning out with legal clauses. Parents often dole out money so that their children do not struggle while planning their future. There's no harm imbibing a little financial discipline.
*Save up some other way: According to a study by the India Human Development Survey (IHDS) conducted by researchers from University of Maryland and National Council of Applied Economic Research (NCAER) , New Delhi, almost 77 per cent of Indian parents expect to live with their sons in their old age while seven per cent want to live with their daughters. Given that India is a traditionally and culturally bound society, living together temporarily while you save up for your first home may not be a bad idea either. This will help you and your parents staying financially stronger. The dependency can be mutually beneficial this way.
*Parents, don't go overboard: Every parent wants to help their children financially when they are buying their first flat in residential projects in India. But they shouldn't do so before going over their finances and ensuring they can afford to live without the money. This is very important if you are about to retire, when you have to live on your assets, investment and savings. Don't put your retirement funds at risk. Your children will have many chances to buy a home, but you don't have the time to catch up if your retirement plan is derailed.
You can use an online calculator; this will help you evaluate the impact that any major withdrawals would have on your savings.
*Saving account vs Retirement account: If you decide to help your children financially, like in down payment or additional costs, it's best to go with flexible cash, say from a savings account. Withdrawing from a savings account is like not earning much in the way of interest, and so you are not losing much in potential gains on that money. Don't withdraw funds from individual retirement funds.
*Gift is better than loan: Many parents who can't afford to help their children with a large amount of money instead prefer to give it as a loan. But that can have an impact on the borrower's ability to qualify for a loan.
Funds received as a gift from a relative or a friend don't count as debt. But, if the money is being borrowed, the homebuyer is required to reveal that loan to the bank, which could alter their assessment of the borrower's debt-to-income ratio.
*Know how taxes pan out for you: Non-institutional loans are not eligible for tax deduction under Section 80C. You will not be able to claim a tax deduction on the principal amount. But, such loans are non-taxable for borrowers and lenders either. Therefore, get your financial concepts clear too.
Parents' take
A survey by Money a study on what parents think is an ideal age for their children to become fully independent and most said it should be 25. Youngsters, on the other hand, felt they should be allowed another two years before they turn financially independent by 27.