Michael Yardney talks about the bank of mum and dad in helping young people get into property. More and more first homebuyers are being forced to rely on their parents to lend them a hand to get a foothold into the property market.
Kevin: Gee, I’m hearing a lot about how difficult it is for young people to get into the market. Look, I agree; I understand a lot of people are absolutely paralyzed about what they should do. There are so many options for them. Let’s to and demystify this a little bit. Michael Yardney joins me.
Michael, I know there are several options for young people to get into the market. Maybe we can just have a look at a few of those and give us your impressions about what they can do.
Michael: Kevin, there are lots of stories about how the younger generation currently – Gen Y’s and the Millennials below them – are having difficulty getting a foot on the property ladder. It’s a combination of higher prices, more difficulty getting finance, and in my mind also, maybe a little bit of lack of financial discipline and people not even getting a bit of a deposit to get going.
But, Kevin, there’s nothing different from when we were young. It was even harder to get a bank loan. You had to wear a suit. You had to put on your tie. You had to go to sit with the bank manager. You had to prove a savings record and save a reasonable deposit. And if you were married, Kevin, when I was young – and I’m pretty sure it was the same when you were young – they wouldn’t take your wife’s income to account, either, would they?
Kevin: No, exactly right. That made it very, very difficult. They actually discouraged you from actually having an investment philosophy by making you sell one property before you moved to another one.
Michael: It was much harder then. Also, I think our expectations were a bit lower. To start off with, we were happy to get involved in any sort of property, buy anything, and in the future, get the dream home. But today, the younger generation want to have all the modern conveniences that it took their parents 20, 30, or 40 years to get.
Having said that, it still is difficult, so we can go through a couple of ways to make it easier.
Kevin: Yes, let’s do that.
Michael: Interestingly, Finder.com.au has done a survey showing how many young families are now turning to the bank of mom and dad to start getting a deposit. The problem is you still need 5%, 10%, and sometimes even 20% deposit before the bank with lend you the rest.
That’s the bit that people are having difficulty with, and in my mind, you can turn to the bank of mom and dad or you can become self-reliant, Kevin, and actually have some financial discipline.
Kevin: Yes, okay. What other advice would you have for them, Michael?
Michael: The first bit I’d say is spend less than you earn. In other words, you’ll never save for a deposit if you spend more than you earn and owe other people money. So, shrink some of your expenses, have a budget.
Now, I know the “B” word – the “budget” word – is a dirty word, but look for areas where you can minimize expenses. Have a look at where you can save things. See what you don’t have to spend impulsively.
Kevin, I have a rather really clever way of doing things. Just before you click the checkout box online when you buy the next doodad or whatever you buy online, just keep it in the shopping cart for 72 hours. And if you still feel you really need it a day or two or three later, then click “Okay,” and go ahead and buy it.
I think we all suffer a little bit from this impulsive spending, and sometimes, you don’t need to buy those things.
Kevin: No, fair enough, mate. That’s good.
Michael: Then what you should do once you have some savings is park it in a high-interest account. Now, unfortunately, today “high interest” isn’t the good high interest we had many years ago. But put it somewhere, where you can’t take it out.
Get an automatic transfer so you pay yourself first. Put that savings into that high-interest account, or if you have bad debt, use it to pay off your bad debt first. But automatically take 10% or more of your earnings out before you spend it. Now, I know some people say, “But I don’t have 10% to give away,” but the answer is five or six years ago, you earned 10% or 20% less and you managed to survive, so you should do that.
Don’t buy anything on a credit card or a store card that you can’t pay off at the end of the month. Kevin, I buy lots of things on credit cards, I love the frequent flyer points, but I’ve never bought anything I haven’t been able to pay off at the end of the month.
The next thing is invest in yourself. Learn about financial fluency. Understand the difference between and asset and a liability, an expense and an outgoing. Understand what good debt / bad debt is.
If you do that, sure, you can still rely on the bank of mom and dad like we said a moment ago to get you started, but if they suddenly give you a gift, if they suddenly give you a deposit, if suddenly you get a windfall, and you don’t have the financial discipline, odds are you’re not going to be able to use it effectively. You’ll probably blow that away, too.
Kevin: Yes, great advice there, Michael. I think the key thing there is your message about credit cards. It’s great to use them, but just make sure that you can actually pay them off so that you’re not accumulating the debt, because it’s very expensive.
Michael: Very much so. Normal debt is at 4.5% or 5% – or even with a 3 at the front of it for a house – but credit card debt is double-digit and often in the high teens. So you’re actually taking money out of the future to live today and paying somebody a high interest rate to have that privilege.
Kevin: Indeed, yes. Great advice.
Michael, thank you very much for your time.
Michael: My pleasure, Kevin.