The Bank Of Mum and Dad: Helping First Home Buyers
With the continued increased pressures on housing affordability in many parts of Australia, the Bank of Mum and Dad has become a highly popular source of funds for first home buyers, helping them to get their foot on the property ladder.
A recent survey by financial comparison website, Mozo, has returned figures of $65.3 billion which has been lent to young home buyers by the Bank of Mum and Dad.
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The Mozo survey shows 29% of Australian parents help children buying their first home and are lending more than $64,000 per family on average.
This is a staggering amount of money, particularly when you consider that many of the parents, around 67%, don’t expect their children to repay the money lent.
Before You Hand Over Your Cash:
I have an important question for you before you hand over your hard earned cash to your child or children;
“Is there a better way to help your kids into their first home without handing over massive amounts of cash?”
Remembering of course, that many parents have already taken a significant financial hit, by allowing their adult children to live at home rent free, to help them save a deposit to purchase their first home.
One way to allow parents to feel safer and keep more control is to provide access to a nominated portion of the equity in their existing home and/or investment property to allow their children to get into their first home without the need to save up a 10% or 20% cash deposit.
Parents can use their existing property/s as leverage for their children to be eligible to borrow up to 100% of the property purchase price plus extra for associated costs, from one of the mainstream banks.
How this works:
80% of the value of the proposed new home is borrowed from the bank and that loan is secured by the new home.
The remaining funds required to purchase the proposed new home are borrowed from the same bank by the first homeowner and this portion of the borrowings is secured by the parents’ property.
If the first homebuyer had zero savings then 20% of the purchased property value, would be secured by the parents home.
- Parents are no longer handing over large sums of cash that may never get repaid, therefore allowing them to keep their hard earned dollars for their own lifestyle and future retirement needs.
- The kids get to avoid paying L.M.I (Lenders Mortgage Insurance) which can run into tens of thousands of dollars.
- The kids get a foothold onto the property ladder much sooner that they would be able to if waiting until they have saved up a big enough deposit.
- The kids end up with a bigger loan and therefore larger repayments.
- Up to 20% of the parents security is “tied up” until the kids property value has increased or the loan is paid down enough to allow removal of the security guarantee
- Potential for complicated issues should there be any marital separations with associated parties (parents and/or kids)
Using parents’ equity from their existing property/s can be an effective strategy to avoid handing over large sums of cash to their children; however, it does rely on the children having sufficient income to support the proposed increased borrowings from the bank.
Protecting parents and kids:
When helping your children with either a cash contribution or providing access to a portion of the equity in your home, it is critical to ensure that all parties are well protected in the legal sense.
When taking the equity guarantor path, parents need to ensure the bank is not taking too much control of their own asset/s and that the equity loan is only guaranteed by a partial amount of the equity. It is important to get the loan structure right so that parents and children are not disadvantaged in any way.
When offering cash to assist your children you need to put some form of legal agreement in place, specifying what is expected in regards to repayment of the debt, whether it be partial, full or if it is to be a non refundable gift.
Another consideration that is often overlooked, is the potential of future marital breakups (parents and/or kids) also needs to be given careful thought and may even be worthwhile to have a lawyer create a simple legal agreement covering the various “what if” scenarios.
Your Children’s Future:
Parents that have owned property for several years would have seen what an excellent vehicle real estate can be for wealth creation, particularly those that have owned property for 15 to 20 years.
It’s important to think about what an immense investment you will be making in your children’s future. How by helping your kids’ get into the market you are allowing them to take a piece of the action, to share in the growth.
You will be helping them secure a solid financial footing much earlier in life, which will help them deliver a brighter, stronger future for their kids (your grandkids).
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Saving Stamp Duty:
Another way you can help your kids get ahead is to show them the benefits of buying off the plan properties.
Off the plan properties are available in different formats to suit various budgets, such as:
- Luxury homes
- House and Land packages
There are many benefits associated with buying off the plan and these are covered in detail within the related article:
How To “Ramp Up” Savings:
One of the key benefits for first home buyers in buying off the plan is that it gives them more time to increase their savings during the construction phase.
Savings can also be "ramped up" during construction by moving back in with parents, for those that are renting and the money not spent on rent can drastically increase savings.
Increasing savings during construction can help to reduce borrowings, alternatively it can help increase your purchasing power, get you an extra bedroom or into a nicer suburb that is closer to your work.
The Great Australian Dream:
The Australian dream of owning your own home is alive and kicking, however, the dream has changed a little, due to the increased costs of property and in a strong desire for today’s generations to live closer into the CBD.
Owning a 4 bedroom home in the suburbs with the big back yard and double garage has changed.
There is an increasing trend for first home buyers to start out with a 1 or 2 bedroom apartment or a 2 bedroom townhouse closer into the city.
Rather than waiting for several years to be able to afford the big 4 bedroom dream home, it's more important to get a foothold on the property ladder now, as the values are continually increasing and can actually get further and further out of reach the longer you leave it.
It’s much easier to start with a smaller property and use it as a stepping-stone.
For young home buyers that are earning higher incomes, with the right structures and guidance, they can also find themselves in a position to hang onto their first home as an investment property when it comes time to upsize their family home.
In relation to ownership and loan structures it’s important for first homebuyers to approach their first purchase correctly in the beginning. Using the right ownership structure and loan structures to maximise tax benefits will be critical at a later stage in your journey. Assuming you want your property to be an effective investment, I would strongly encourage you obtain coaching on this before purchasing your first property.
As for parents that are offering the use of the equity in their own home it is also critical to implement the most suitable loan structures to ensure you are not setting yourself up for avoidable issues in the future.
Effective Use Of Equity:
Before handing over all of their equity, parents that are still gainfully employed and paying tax, should also be considering using some of their equity (the increased value) of their existing home and/or investment property, to leverage into an extra property as an investment for their own future.
We often refer to the increased value that is hidden away in clients’ homes to be ‘lazy equity’. Many homeowners don’t realise how much leverage they could be getting out of the existing equity in their homes.
Often the first and foremost priority has been to pay off their first mortgage, and no thought has been given to buying another property.
They may also not be aware that you don’t need to wait to save up a 10% deposit to buy an investment property if you have sufficient equity in your existing home.
If you were to pause for a moment and think about the equity gains that your existing property has achieved and then imagine for a moment the possibilities if you were to multiply those gains by owning an extra property or even several extra properties.
Positioning yourself to own multiple properties with the potential to simultaneously gain equity, could allow you to maximize your tax benefits, rapidly increase your wealth, deliver a better lifestyle, and provide for a more enjoyable, comfortable retirement.
Whether you are wanting to help your kids get into their first home or you would like to learn more about investing in property yourself, I would urge you to take action today to take advantage of the lazy equity you are most likely sitting on. Let us show you have to make it work for you and/or your children.
Reach out today and book a complimentary coaching session with Darryl Simms
Author | Speaker | Property Investment Specialist
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