A recent survey discussing the current sentiment around Australian Real Estate showed that many parents, despite the fact that interest rates are at an all time low, believe that their children have it much harder than they did when it comes to entering the property market for the first time. With the average property in Sydney now over the $1 million mark, it's easy to see why. That's why parents are trying to do more to help their children buy property, and now they may be able to do so without jeopardising their own future.
In years gone by, many parents have put the family home on the line (and, in turn their own retirement plans) in order to give their kids a leg up on to the property ladder.
Often this was done with little consideration for their own livelihood or retirement circumstances, and sometimes tragically for one reason or another, the family home was lost when things went wrong.
With these horror stories circling around suburban barbecues, and along with the GFC eating away at many of the Superfunds of would be saviour Mum and Dad, we've seen fewer and fewer parents willing to take this leap for their children.
However, banks have recently altered the responsibilities of the "guarantors", meaning parents only have to offer a limited guarantee rather than placing their entire property on the chopping block. This arrangement limits the amount the bank can claim back from the extra property offered as security, creating a much larger degree of protection for the parents.
For those who are new to the concept of parents acting as a guarantor for their children, here is an outline of how this may work.
In order to avoid lenders issuing mortgage insurance (an extra charge by lenders when the loan to value ratio is above 80%) potential buyers who have a good borrowing capacity, but who have not been able to acquire the required deposit, can borrow 80% of the value of the potential property they are purchasing. The remaining 20% of the loan is held against a separate security. In this case, their parents home which by now has plenty of equity.
So here is what a potential buyer must have, and how they may be able to purchase without saving for a deposit:
So on a $500,000 purchase, this means the borrowers need $12,468 for stamp duty plus approximately $2000 for costs so rounded up a total of $515,000 in total for the purchase.
So should the children default on their repayments and the bank come calling for their money back, the maximum the parents could be left with in debt is $90,000, as opposed to risking losing their entire property.
This can be a great way for parents to help their children purchase their first home, or perhaps to get their children involved as investors and taking advantage of these historically low interest rates.