Interest rates are currently at historic lows which has seen Capital City property prices experience substantial growth. The great Australian dream of home ownership is becoming increasingly tougher for current younger generations without assistance from Mum and Dad.
Actually saving for a home deposit in this low interest rate environment is becoming harder and harder.
Increasingly it seems children are now seeking the assistance of Mum and Dad to be able to enter the property market. For many years the only way banks would provide funding for a property purchase without a deposit was if physical cash was “gifted” to the children from Mum and Dad in order to represent the required deposit for the property purchase.
This is no longer the case, with many lenders now offering alternatives called “Family Pledge” or “Family Guarantor Loans”, where instead of cash gifts being provided to represent a 20% deposit, family members are actually able to provide a limited guarantee of an existing property security to be added as security to the new property being purchased. The property is owned in the children’s names and the limited family property guarantee can be released once the loan has either been reduced down sufficiently or the market value of the property being purchased reaches the 80% “Loan to Value Ratio” or LVR. It allows people who do not have a deposit or sufficient savings to be able to purchase a property with the support of a family member. The guarantee being provided is limited to the 20% deposit that would normally be required for the property purchase.
One of the potential benefits of these types of loans, is that because sufficient security of 20% of the property purchase is being provided to the banks, you are able to avoid the expensive “Lenders Mortgage Insurance” or LMI banks would normally require if less than a 20% deposit was being provided.
An important consideration when exploring these types of loans in particular is do the children have sufficient incomes to be able to meet and service the loan repayments over the life of the mortgage, especially in this low interest rate environment, when interest rates will inevitably rise at some point over the potential 30 year life of the loan.
Another important consideration would be reviewing income protection and lump sum insurances for the borrowers to ensure that in the event of anything untoward happening to either borrower, the mortgage is fully protected and able to be repaid.
This is still a very complex area and it is important to fully understand the risks of helping out a family member and it is therefore important that you seek independent legal and financial advice.