It has never been harder to enter the housing market with the average household now spending 40 per cent of net income on their mortgage.
This is well above what we call mortgage stress.
Almost unbelievably, this isn’t even the reason first home buyers are unable to enter the market.
Many young people are prepared to make repayments at this level but are unable to enter the market with the lack of a deposit being the main barrier to entry.
It is becoming increasingly necessary for parents to help their children purchase their first home.
There are a number of strategies that can be utilised to help get your kids on the property ladder.
Offering your home as security
For many baby boomers and older Gen X’s, the bulk of their wealth is in their primary residence, with most having a reasonable amount of equity in the property.
It is possible to offer your home as a security on the loan in addition to the house being purchased by your child. This security acts as the deposit.
We normally recommend that you establish two loans. One for 80 per cent of the bank valuation of the property being purchased, on this loan only the new house will be listed as security. The second loan is for the remainder of the loan and will have both houses as security. If the loans are structured this way, it limits the exposure for the parents and prevents the need for mortgage insurance.
Being a guarantor
In some cases a bank will allow you to act as guarantor on a loan to help your child qualify for a loan. In this case, your assets and income will be relied upon for the loan but will not be used as direct security.
In the event that your child defaults on the loan you will be equally responsible for the loan, but the bank won’t hold a mortgage on your home. The value of your assets will not be relevant for mortgage insurance purposes.
Being a joint borrower
This essentially means buying a property together, this is a bigger commitment.
In this case, you will be responsible for making repayments and benefit from any capital growth or income from the property. I feel this works best with an investment property rather than a home your child is going to move into.
In this case, I’d recommend outlining upfront the long-term plans, I would formalise exit strategies and would strongly urge you to get a formal agreement in place.
All three of these options will enable you to help get your children into the property market.
However, make sure that if you do this, the children themselves are able to afford it and you are not setting them up for failure.