Helping your children climb the home ownership ladder
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With house prices skyrocketing over the last few years in many parts of Australia, first home buyers have been gradually squeezed out of the market. For many the dream of owning their own home is fading and some may miss out altogether.
Those of us moving into the later years of a career or into retirement may have adult children wrestling with this issue right now. As parents we may want to help give them a leg up as best we can, but that can sometimes carry risks for our own retirement security, so it certainly pays to be cautious.
Mortgage Choice CEO John Flavell says that their data shows shows the percentage of first home buyers getting a parent or other family member to go guarantor on their loan has surged by approximately 10 per cent in recent years.
John Flavell, Mortgage Choice CEO
“This growth in guarantor loans can be attributed to two main factors: surging property prices and weak wage growth,” he says. “Because of these two factors, first time buyers are finding it harder than ever to save a home deposit and get their foot on the property ladder.”
The following tips may give a birds-eye view of what help is available for first home buyers and what you need to be aware of if you want to give them assistance.
The Budget boost
In the recent Federal Budget a package was announced that will be a welcome shot in the arm. The First Home Super Saver Scheme will come into effect 1 July 2017 (providing legislation passes).
The scheme allows participants to place up to $15,000 per year (up to $30,000 in total) of voluntary contributions into their super and then withdraw the funds, along with any earnings, when they come to buy their first home.
This allows those savings to benefit from the tax benefits that super offers. Each partner in a couple can utilise this scheme so that at total of $60,000 can be contributed.
First home owner grants
The First Home Owner Grant scheme provides new home buyers with grants of $5000 up to $25,000. The Federal Government launched the scheme, but it is administered through states, each with their own different criteria and structure. Details are available from each state’s office of state revenue.
A mortgage broker can be a useful ally in helping you identify and apply for the grants available to you as part of their service, so consider enlisting their help to make sure full advantage is taken.
How parents can help
The “bank of mum and dad” is increasingly becoming a part of the equation for first home buyers and their assistance can be provided in different ways.
At the most basic level, parents can provide a cash handout toward the deposit. This can help the first home buyer to get over that all important first hurdle, but bear in mind that lenders will require the gifted funds to be held in an account for a period as evidence of saving discipline and ability to service a loan.
Acting as a guarantor
Becoming a guarantor can be a useful way to use your financial resources to help your children, without actually handing over cash. A guarantor essentially involves using your equity as security for your child to obtain mortgage finance.
“When a buyer has a parent (or other immediate family member) go guarantor on their loan, they are effectively able to get on the property ladder sooner,” Flavell says.
In many cases, a guarantor can nominate how much of the loan they’re prepared to guarantee and how long they wish to act as guarantor for. “The guarantor saves them from having to build a significant property deposit and, in some cases, saves them from having to pay Lenders Mortgage Insurance.”
“And, while the benefits of having a parent or immediate family member go guarantor on a loan are obvious, it is also important to note that these loans can be risky. If the buyer defaults on their loan and can no longer meet their mortgage repayments, the guarantor is legally responsible for paying back the entire loan. For this reason, it is imperative that all buyers and guarantors seek the appropriate legal advice before heading down this path.”
It is also important to have a contingency plan in place in case the borrower is struck by illness, job loss or other misfortune. The risks are substantial to the guarantor, so make sure both sides of the arrangement are aware of the potential downside.
Again, speaking to a mortgage broker can help you to weigh up the pros and cons of being a guarantor, so take advantage of their expertise if you have concerns.
Other options may have less risk
A way of helping with potentially less risk is to consider loaning funds to your children. This needs to be done with strict guidelines and conditions – preferably using the advice of a solicitor – so that the child fully understands their commitment.
Another option is to go into a partnership with your child to purchase a home. This helps limit the need for them to borrow and gives you the security of knowing that the equity is still yours if you need it.
The drawback with such an arrangement is the potential for family disputes and complications to arise. For example, your child may divorce down the track, or they may also want to dip into the equity to fund other lifestyle goals and this may be at odds with your wishes, so get the ground rules sorted out at the outset.
It is natural for parents to want to help their children get a start in life and have the stability of home ownership. The above tips show that there are many ways to do it, but caution needs to be exercised to make sure your financial security is not put in jeopardy.
A mortgage broker and other professional assistance can be an essential part of the process for weighing up the merits and risks and achieving a balanced solution that suits both parties. Click here to watch a video on what it means to be a guarantor.
What are your experiences in helping your children achieve their home ownership goal? Share your thoughts below.