A growing number of Australian families are helping younger family members to buy their first home. Some parents and grandparents are even said to be sacrificing their retirement plans to offer first home buying assistance to those they love.
According to a recent survey conducted by an industry super fund, some 20 percent of Australian families have assisted a family member financially to buy their first home. Twenty-six percent of survey respondents also stated that they received financial assistance from a family member to buy their first home.
The survey suggested that loans and gifts were the most commonly given forms of assistance. Some 22 percent of participants said that they had received a loan or gift, while another 5 percent stated that they had guarantor support.
A survey spokesperson said that the results reinforced housing affordability struggles in Australia and that the impact of high housing costs was significant. This spokesperson also noted that it was becoming harder for parents and grandparents to assist family members to buy their first home, and to protect their retirement funds.
Types of First Home Buying Agreements
Research indicates that many parents and grandparents who are financially assisting first home buyers to purchase their first home had entered into agreements with the first-home buyers. Two of the most common forms of agreements were interest-based repayments of the loaned amount or the use of the family home as equity under a security-based guarantee.
Agreements between the first-home buyer and the person providing financial assistance are drawn up, legally, in most cases. The amount borrowed is then repaid over a specified time, with interest paid, so that the provider of the financial assistance is compensated for their involvement.
According to the survey, interest-based agreements had increased by 24 percent over the last 5-years. In the 2011 survey, only 12 percent of participants said that they had entered into interest-based agreements.
This increase, according to the survey spokesperson, was likely associated with the need for the family member to recoup retirement funds so that they didnt compromise their quality of life at a later date. Also, it is suggested that the interest-based agreement taught first home-buyers the value of money and how to buy property effectively with limited funds.
Using Home Equity
Not all parents and grandparents can afford to gift their children and grandchildren money. However, there is an alternative to this form of finance called a family guarantee that enables family members to help, providing they have a family home or property assets.
A family guarantee occurs when a lender uses a portion of the equity in the family home or another residence as extra security for the first home-buyers loan. This added security then reduces the risk for a lender, as they have a mortgage over the property that they are financing and a partial interest in the property offered as security.
For example, a first home buyer wants to buy a $300,000 home, but they have only saved $25,000 towards a deposit. However, to avoid paying lenders mortgage insurance (LMI), and cover stamp duty costs, a total of between $61,000 and $74,000, depending on the state where the home is purchased, is needed to buy the $300,000 home. Therefore, an additional $35,000 and $49,000 is needed to secure the loan. The family member who is helping the first home buyer has a property that is valued at $650,000, and they owe $50,000 on this property. Therefore, they have $600,000 in equity that they can use for security. This family member can then enter into a guarantee with the lender to secure the funds needed for the first home loan.
The beauty of an equity-based guarantee is no money exchanges hands, and the first home buyer is still responsible for the full home loan amount, not the person offering the security. The guarantee of the property offered for security also typically expires when the equity in the first home buyers property exceeds the value secured.
Are you seeking to know more about how you can help a family member buy their first home? Then contact eChoice, we can help YOU to find an affordable solution.
Written by eChoice
Since 1998, eChoice has helped more than 50,000 Australians secure a home loan through its network of over 25 lenders and hundreds of loans. Best of all our service is cost and obligation free!