Property prices continue to rise making it harder for Millennials (Gen Y) and now Gen Z to get a foothold in the market as easily as their parents’ generation.
The difficulty is that while many young buyers can afford the repayments on a home loan, they cannot save a large enough deposit to satisfy the banks. So, if you think it’s time for your children to leave the nest, or for them to stop spending their hard earned cash on rent, there are a few ways to give them a helping hand and get them on their way to purchasing their first home.
But first, here are a few things about lending with banks you need to understand what follows…
When banks lend above 80% of a property’s value they usually require to see that the borrowers have managed to save at least 5% of the purchase price themselves. The balance of any contribution they make towards the purchase does not need to be from savings. It can be a gift, inheritance, winnings from the Casino…just not borrowings.
To make matters a little easier, if the borrowers are given a gift of money and hold it in their bank account for 3 months, most lenders will then consider that money to be “savings”.
Where a borrower is going to take a loan that is 80% of the property value (or less) then the banks are not concerned if the borrower’s contribution is savings or not. They are more flexible as their exposure is less. So remembering this, lets move on…
A cash gift as a deposit is the most straight-forward way that parents can assist their children get in to the property market. With a cash gift held for 3 months by the borrowers they have the “savings” that the lenders want to see and then lenders will consider lending up to 90% or even 95% of the purchase price. Lenders mortgage insurance (LMI) is payable by the borrower on lending if it is above 80% of the property value but often this can be added onto the loan amount and does not require the borrower to have additional funds to cover this cost
Usually lenders will want to see a letter from the parents confirming that they will be providing a gift which is not to be repaid and evidence that the parents have the money or have already given it to the children.
A Family Pledge (Guarantee)
While not every family is in a position to hand out cash to the kids, there are some other strategies that allow you to give them a start.
A guarantee from a family member can remove the need for a purchaser to have genuine savings, or even any of their own money, to put towards a purchase.
How does it work?
A guarantor effectively allows the equity in their property to be used as additional security for the borrower’s loan. This can allow the borrower to borrow 100% of the purchase price plus all the on-costs (stamp duty, government fees etc).
This strategy does not require you to have any savings or liquidate any assets, reducing the risks and financial strain for yourself.
The borrower (your children) must be able to service the entire loan by themselves. You as the guarantor are simply putting up a property as a second security for the loan.
As the size of the mortgage decreases and the value of the purchased property grows, the guarantee can be released, allowing your child to take full responsibility for their home and mortgage.
What is the scope of the guarantee?
The borrower’s lending falls into 2 parts. The first part is an amount equal to 80% of the property value at the time of purchase. This is secured solely against the property purchased.
Any borrowings above this amount, typically, the last 20% of the purchase price and any on-costs financed is secured against the property purchased AND the guarantor’s property.
So the extent of the guarantee is only the last 20% of the purchase price and on-costs. Not the total lending.
What if the guarantor already has a loan on their property?
Even if a potential guarantor has a loan on the property offered as security they may still be able to provide a guarantee if the total of existing lending and the guaranteed sum is less than 80% of the property value (and subject to the consent of the primary lender).
Risks to be aware of
While becoming a guarantor can be a great way to help your children break into the property market, there are some associated risks you need to be aware of.
While you do not have to put up any initial capital, you will be liable for the lending secured against your home if your child defaults and the proceeds from the sale of their property does not cover the total debt.
So before becoming a guarantor, it is important to have a full and open discussion your child about their financial position, their ability to make the required repayments (and even pay the loan down quicker), and what is expected of them in terms of communication if they have problems making repayments.
It is also critical that your child is aware of the risks you have undertaken by becoming their guarantor.
Who can be a guarantor?
The answer to “who can be a guarantor?” varies a bit from lender to lender. Parents are the most common guarantors however it can include any immediate family members such as siblings and sometimes grandparents. Feel free to ask us if you have any questions in relation who can be a guarantor to a loan.
Buying an investment property
Lots of young people come to see me, keen to buy a property but unable to afford a property they would be happy to live in, and in an area they would be happy to be situated.
One solution for these young buyers is to buy a good investment property and continue to rent. This way the property does not need to be in an area they want to live or of a size/quality they would want to live in. And this can open up opportunities to by a property that would not be possible if it was to be a place to live in.
Getting into the market sooner rather than later means that if property prices are growing then they are getting the benefit of this. It also provides tax benefits via negative gearing. Then in 5-10 years time there is the opportunity to sell the investment property and use the proceeds and savings to buy a home to live in. Typically buyers who adopt this approach are going to be significantly better off than friends who did nothing for same period of time and then looked to buy a home.
So there are a number of ways for family to assist first-home buyers get in the market. It’s a question of what is possible for each family and it needs good, open, two-way discussions about goals, expectations and plans so that everyone understands clearly what is being done and what the plan is.
If you are looking to help family members get into the property market, or are looking for family to help you get into the market, then we would love to talk to you and see if any of this is appropriate to your situation. Please contact us today to see if we can help you.