It is no secret that first home buyers are finding it extremely tough to enter the property market. In this article TRACY KEAREY delves into how parents are bridging the deposit gap.
House prices and stiff competition from property investors, both local and overseas, has all but shut the door in the face of young people wanting to get into their first home.
And things could get worse for new home buyers, with APRA (the Australian Prudential Regulation Authority responsible for overseeing all the banks, credit unions and building societies) signalling its concern over the growth in lending to higher risk borrowers which typically include borrowers contributing less than a 20% deposit. The regulator has made it clear that it wants the industry to take a less risky approach to their new lending activities.
The upshot of all this is that lenders are being asked to avoid increasing risk in their loan books by lowering their lending standards. And this may have a knock-on effect for prospective home buyers and investors because mortgage providers may tighten their lending guidelines, especially for loans above 90% of the property value, which much of younger home buyers rely on.
Of course, increasing the deposit is easier said than done, and while first home buyers are trying to save the extra funds, property prices are racing ahead of them.
So, is there an alternative for home buyers to circumvent this problem?
For those lucky enough to have parents who are willing to help, we are seeing an increasing trend towards ‘parental guarantees’ or ‘family pledge’ loans.
What this really means is that where parents have a property (can be their own home) with enough equity, they can help their children get into their own home a lot sooner and with substantially less costs.
To better explain, we have created the following example for Katie a home buyer. She is not eligible for the First Home Owners Grant and only has a 5% deposit.
In this case it would be almost impossible for Katie to obtain a loan as the costs would blow out due to Lender’s Mortgage Insurance (LMI) premium and Stamp Duty etc.
Assuming a purchase price of $500,000 Katie would need a total deposit of $51,950 to complete the purchase as follows:
In this case Katie has a deposit gap of $26,950 which prevents her from obtaining a loan.
However, if Katie’s parents had a house worth say $700,000 on which they still owed $200,000, they could assist Katie by allowing her to borrow against the equity they have in their home.
The parents’ home could be used as follows to provide the necessary deposit for Katie to have enough funds to complete her purchase:
With the assistance of her parents, Katie’s loan would now look like this:
Katie would save herself $16,600 in Lender’s Mortgage Insurance (LMI) premium and enjoy her new home a lot sooner by not having to save the additional $26,950 if she was doing it on her own.
It’s important that Katie’s parents understand the risk involved by offering their property as collateral security for her loan. However, this doesn’t have to be a permanent situation.
As Katie pays down her loan and when her property goes up in value, she can refinance her loan on her own, once she has accumulated 20% equity in her property.
If you’re a first home-buyer and need a finance mentor to sort out where you are at and what options you have, give Tracy Kearey a call on M: 0417 738 469 or T: 1300 888 299. She’ll guide your through the process, outline the steps to move forward and even help you with how to apply for the First Home Buyers Grant if applicable.