Protecting the Bank of Mum and Dad
The issues facing first homebuyers entering the Australian market are complex, and affordability remains at the centre. Housing prices, while now starting to increase, have grown at twice the rate of wages.
As a result, more and more first homebuyers are looking to help from family to reach that all-important 20% deposit (what is required by most banks without the need for Lenders Mortgage Insurance).
There is a range of options available, ranging from gifts, to guarantees, to more formal agreements. But what do these options look like for the contributors? How can you ensure that you are protected in the event of changing circumstances (e.g. relationship breakdowns, financial difficulty)?
Let’s take a look at what you’re in for with each option.
1. A Gift
The most straightforward option, this would mean that you fund part or all of a deposit, as a gift with no expectation the money would be repaid. The loan itself would remain entirely with the homebuyer.
What you need to know: You would be required to provide evidence that the money is a gift, and seek financial advice on any potential impacts to future plans, such as seeking a pension.
2. Family Guarantee
This option allows you to use the equity in your home as additional security on the loan. It doesn’t require you to gift cash, or move funds.
It effectively creates a separate loan, for the amount of the deposit, which is repaid first by the homebuyer, followed by the second loan of the remaining property amount.
What you need to know: If the homebuyer is unable to pay and defaults, you’ll have a legal responsibility to repay the loan along with any other fees and interest. Consider your long-term financial position for the life of the loan as it will risk your property if you cannot repay it.
3. First Start: Shared Equity Agreement
A winner of an Innovation Excellence award from Canstar, this is a formal, three-way agreement is between the homebuyer, the contributor (you) and the lender (Bank First). The contribution is in the form of a cash loan, with the flexibility to change to a gift if you choose. If it remains a loan you would also share in any increased value of the property (equity) in the future when the property is sold.
What you need to know: You would need to access cash to provide the loan (versus using an asset as security) but your home, assets and credit rating are not as risk.