How your parents can help you get a foot on the property ladder
Empty nests may soon be a thing of the past as younger generations find it ever more difficult to secure their own home.
The Reserve Bank of Australia (RBA) recently lowered the official cash rate by 25 basis points to a record low 0.5% to support the Australian economy in the face of the coronavirus outbreak. And the cut was swiftly passed on by home lenders (Heritage Bank included), making home loans cheaper.
However, rate cuts are a double-edged sword.
Home loans are cheaper but what will be the impact on prices? That's the eternal lament of first-home buyers, who in previous upturns have found themselves priced out of the market by investors and upgraders.
Property prices in the major Australian markets are already moving back up towards record levels after last year's slide.
In one of only two paragraphs without a coronavirus reference, the RBA's March statement noted: "There are further signs of a pick-up in established housing markets, with prices rising in most markets, in some cases quite strongly."
The International Monetary Fund has also warned "looser financial conditions could re-accelerate asset-price (read: housing price, among other things) inflation" in its latest country report for Australia. There's no doubt the recent sharemarket correction and the continuing search for yield will fuel this latest rush into housing.
So this suggests that many an aspiring nest-leaver is going to need even more of a helping hand from mum and dad.
What are the options, then? The three most obvious and significant are:
- A gift of all or part of the deposit (or more)
- Joint ownership (and stumping up the equity)
- Going guarantor on the home loan
Of these, the third is becoming the most interesting. It used to be that parents would need to guarantee the entire home loan extended to one of their offspring.
Families have come to grief because, in the worst of circumstances, it meant parents having to pay back the entire debt, ending up with a damaging credit report and losing their own homes or other assets.
Now, however, there are loans available over which parents can go part-guarantor. An example is Heritage Bank's Family Guarantee home loan. These limit the liability of mum and dad to the level they feel is manageable, while also delivering benefits like removing the need for lenders mortgage insurance.
They work by splitting the total amount across two loans - one loan secured by the property being purchased, and the second loan partially secured by a family member's property as guarantors.
These have generally been restricted to owner-occupier loans. However, recent market surges have seen an increase in rentvesting, where home buyers opt to rent where they want to live and purchase an investment as their first home in areas they can afford.
About 340,000 Australians are using this strategy, according to the Australian Bureau of Statistics. The Property Investment Professionals of Australia's Annual Investor Sentiment Survey 2019 similarly found that among first-time investors just over one third (34%) identified as renting elsewhere.
The good news is that home loan products have now started responding to this evolution of the great Australian dream of home ownership.
Just this month, we ourselves opened up the Family Guarantee home loan to investors, recognising that many young investors deserve more affordable loans and parents deserve peace of mind.
And it's better to see our children happy, secure and enjoying life while we as parents are still around. It means we can sit back and enjoy a much more rewarding view from our empty nest.