September 26, 2013
It’s no secret that for many first home buyers, getting into the market can be tough. Whether it’s saving a deposit, securing stable employment or finding a suitable property at the right price, many find the whole process overwhelming and end up renting or staying at home longer than they or their parents would like.
Plus we've seen the First Home Owner Grant eligibility reduced to only those building or purchasing a brand new property.
And the evidence backs this up, with figures from the Australian Bureau of Statistics showing first home buyer loans have fallen to less than 10% of the overall home loan market.
But it's not all doom and gloom. We are increasingly seeing parents coming to the rescue of their children by helping them financially get into their first home. The reasons for this are many, as are the options that are available.
To purchase a $500,000 property without a substantial deposit, you may need to borrow up to 95% of the purchase price ($475,000). When borrowing over 80% of the purchase price, you have to pay for lenders mortgage insurance which would add approximately $15,000 to the loan costs.
To avoid paying the lenders mortgage insurance in the example above, you would need at least $100,000 (20% of the purchase price) plus $25,000 for stamp duty and other costs associated with the purchase. So that makes $125,000 in total with a loan of $400,000 (80% of the purchase price).
For many first home buyers, saving $125,000 in the short term is not achievable. Thus a growing number of parents are helping their children get into the property market and avoid paying lenders mortgage insurance. Of course if you don't have some share cash that you are prepared to give as a gift, there are a number of other ways to help: -
Take out a loan against your own property
Borrowing against your family home or an investment property for the amount that you would like to give or lend is a low risk strategy as the amount borrowed is relatively small. Also you are not responsible for the loan repayments on the new purchase.
Secure the funds in a term deposit
If you have the funds available but are uncomfortable handing them over, securing them in a term deposit may be the answer. In this scenario the term deposit is used as additional security for the loan, enabling potentially 100% of the purchase price ($500,000 from the example above) to be borrowed without paying mortgage insurance.
Provide additional property as security
Putting up the family home or an investment property as additional security for the loan can mean the entire purchase price plus costs can be borrowed against the security of two properties.
This strategy can carry a higher risk as you become a guarantor and potentially responsible for the loan repayments if the children get into financial difficulty. The good news is that many lenders now offer limited liability guarantees which mean you are not liable for the whole loan amount.
Over time as the loan is paid down and the value of the property increases, the term deposit or property can be released as security.
With any of these options, it is important to discuss your own situation with an experienced mortgage broker and to also seek financial and legal advice before deciding what is the best option for your circumstances.
To find out more about these options, please call us on 9432 6070 or click on the ‘contact us’ tab at the top of this page.