Buying property in Melbourne is harder for young people than ever before. At the end of 2017, the median house price in Melbourne was a staggering $821,000. That’s more than 10 times our average annual full-time salary. What’s more, the 14th Annual Demographia International Housing Affordability Survey released in January shows Melbourne now rounds out the top five least affordable places to buy a home – behind Hong Kong, Sydney, Vancouver and San Jose in California.
It’s enough to put young people off the great Australian dream of home ownership altogether. And with house prices continuing to rise in most parts of Melbourne, it’s no wonder more and more are turning to their parents for support in buying their first home.
Let’s take a look at some of the ways you can help your kids get a foot on the property ladder.
It may not be an attractive option for some parents or adult children, but allowing your child to live at home is one of the cheapest ways to help him or her save for a deposit.
Your child can put the money he or she would otherwise spend on rent into a deposit savings account.
Your household bills will go up, but you can always ask your child to contribute to these. Your child will also need to remain disciplined not to spend the money they’re saving on other things.
You can loan money to your son or daughter to help them buy a home. In this case, you’ll need an independent third party to create a legally binding document. The agreement should set out the terms of the loan, including the amount, any interest, repayment schedule, special conditions and how you’ll manage defaults.
Your assets and credit rating won’t be affected like they will with a guarantor loan or joint mortgage. And you come up with the terms of the loan, rather than being locked into a lender’s set terms.
Legal problems could arise if your child is in a relationship that breaks down. You also need to consider whether you or your partner would need the money sooner if one of you died.
If you have the money on hand, you can choose to give some, or all, of a deposit to your child as a gift.
You can help your son or daughter without the same implications of signing as a co-applicant or going guarantor on a loan.
Most lenders will ask you to declare that you do not expect the gift to be repaid. Some lenders ask for proof of genuine savings for a loan, so a lump sum gift would not be approved. It’s important to speak to your financial advisor about any tax implications of a gift.
If you’re not in a position to give or lend money to your child, you may be able to help by acting as the guarantor of your child’s mortgage.
With a guarantor loan, you agree to use some of the equity in your home as security against the loan.
A guarantor loan can enable your kids to borrow without a deposit, or, borrow a larger amount. You can also choose how much you’re comfortable to contribute as security on the loan.
You may need a certain amount of equity in your home to be approved. And you’ll have to agree to cover any monthly mortgage payments if your child defaults.
If your child can’t afford the full deposit and/or repayments, you can take out a joint mortgage. In this case, you agree on an amount you’ll both put into the deposit and repayments, and you both own a stake in the property.
Your child might be able to buy a more expensive property as lenders will take your earnings into account when assessing the mortgage. They also won’t necessarily need to save the full deposit if you’re able to contribute to this.
You need to be on the same page with the type of property you’re looking for and any other investments you’ll need to make such as renovations and repairs. Becoming a co-applicant may only be an option if you’re still working and under a certain age. You’ll also need to make the repayments if your child defaults on the loan.
We all want our children to have the freedom of financial security. But before you decide on how to help your children buy a property, make sure you understand all your options and the implications of giving or lending money. This will ensure you remain in the best position to help your child become a homeowner.
Mel Finance offers a friendly, flexible and efficient mortgage broking service, personalised to meet your needs. Contact us today to discuss the right financial arrangement for your family.