How Parents Can Help Their Kids Get Into the Property Market
Utilising Parental Equity
Many parents have substantial equity in their homes but might not realise how it can help their children. Paul explains that at BrokerCo, we frequently facilitate transactions where parents leverage their home equity to assist their kids in purchasing a property. By securing up to 20% of the purchase price against the parents’ property and combining it with an 80% loan on the new property, it’s possible to finance 100% of the purchase price. This method also allows borrowing for stamp duty and avoids lenders mortgage insurance (LMI), which can save a substantial amount of money.
Advantages of Using Equity Over Cash Gifts
While gifting cash is an option, not all parents have the liquidity to provide such support. Leveraging home equity, however, is a practical alternative that can offer substantial financial assistance without requiring upfront cash. This approach makes it easier for young buyers to enter the market without placing a significant financial strain on their parents. In addition to this costly Lender Mortgage Insurance can be avoided, which can typically range between $15,000 & $25,000 depending on the purchase price.
Overcoming Market Challenges
Entering the property market today is notably difficult due to high property prices and stringent lending criteria. However, with parental support through equity, these obstacles can be more easily navigated. The assistance from parents can provide the necessary boost to overcome these barriers, making homeownership more accessible.
Understanding the Risks for Parents
Paul explains that while this method is highly effective, it’s essential to understand the risks involved for parents. The primary concern is the possibility of their children not making mortgage repayments. However, Paul reassures that in his extensive experience, issues are rare. Key factors include ensuring the children have good character, stable jobs, and a solid repayment plan.
Once the property appreciates—typically by around 20%—the parents can be released from any obligation through refinancing. This process usually takes a couple of years, depending on market conditions.
Real-Life Example: Leveraging the First Home Buyers Grant
Mal Cayley provides a practical example to illustrate how these methods work. For instance, purchasing a property for $575,000 with the help of a $30,000 First Home Buyers Grant (find out more here). Once completed, the property might be valued between $625,000 and $650,000, providing instant equity and allowing the borrower to remortgage and relinquish parents early on.
Additionally, if parents decide to downsize, a security swap with the bank can be arranged. This means the parents’ sold property’s security is transferred to the new property, simplifying the process.
The Best Leg Up in the Market
Leveraging parental support through home equity is one of the best ways for young buyers to get a leg up in the property market. This method can make homeownership achievable and more affordable, providing a significant advantage without requiring a cash gift.
At BrokerCo, we specialise in facilitating these transactions, ensuring a smooth and secure process for both parents and their children. For more information on how we can help you get started on the property ladder, contact BrokerCo today or continue reading our blog for the latest updates and tips.