May 20, 2021
Buying a home has become an intergenerational family affair, with new research showing the extent to which parents are providing financial assistance to their children.
Mortgage Choice research shows that nearly 60% of respondents would consider gifting or lending money to their children to help them buy a home.
With property prices high and continuing to rise, home ownership assistance from the Bank of Mum and Dad is welcome news for young Australians trying to get a foot onto the property ladder.
Susan Mitchell, Chief Executive Officer, Mortgage Choice, said, “As parents, we’re used to doing what we can to help our children achieve their goals. In a housing market recording such phenomenal growth, it’s perfectly understandable that parents look for ways to help their kids buy a home, whether that be as a guarantor or providing them with a gift for their home loan deposits.”
The latest CoreLogic Hedonic Home Value Index revealed national dwelling values rose 1.8% over April 2021 - 10.2% higher than the COVID low in September 2020.
“The average dwelling price in Australia’s capital cities, in particular Sydney and Melbourne, are prohibitive which means those looking to buy their first home will need all the help they can get,” said Ms Mitchell.
What is a guarantor?
Parental support can come in many forms, such as providing a cash gift to contribute to the deposit or by becoming a guarantor on their loan. A majority of respondents (53%) said they would go guarantor on a home loan for their child. A further 45% said they would consider using the equity in their home to help fund their child’s first home purchase.
“Property equity is a tool parents can use right now to help their children realise their homeownership goals. Mortgage Choice application data revealed that 6.14% of first home buyer home applications used a guarantor in 2020. Getting into the market with a guarantor loan means that parents won’t have to give their kids money. Instead, they can use the equity built up in their home,” said Ms Mitchell.
Advantages of a guarantor home loan
“Being a guarantor on a loan eliminates or reduces the amount the child needs to raise for a deposit and can get them into the market sooner. Instead, the guarantor uses the equity in their home as additional security against the child’s loan. This can also help reduce the Loan to Value Ratio to reduce or remove the costs of LMI.”
“Be aware that going guarantor is not a straightforward process. Borrowers and their guarantors should seek legal advice to ensure they understand their obligations and consult a qualified mortgage broker to ensure the loan is structured to minimise risk. Brokers have helped many parents go guarantor, so they are well placed to advise you and your children of all that is involved,” concludes Ms Mitchell.