DESPERATE and deposit-less first home borrowers are among those taking out two loans in order to get their foot onto the property ladder.
As the housing affordability crisis continues to worsen in Australia, aspiring entry-level buyers with little or no savings behind them are relying on their parents to stump up their deposit which they are formally agreeing to pay back – with interest – while also paying off a mortgage.
Parents are forgoing handouts and instead signing their kids up to even more debt by making them sign legal documents to repay back the money they stumped up to help them enter the real estate market.
Non-bank lender BlueBay rolled out ‘parent assist’ loans last year, allowing entry-level buyers to borrow up to a 20 per cent deposit from their parents and take out a mortgage for the remaining balance.
Director Don Crellin said these types of loans were increasing in popularity and it was a way that would work out well for both the parents and the child.
‘While we are trying to do is help the kids and we are also trying to help mum and dad in a way that wasn’t exposing them to risks,” he said.
‘We are bringing both the parent and child together to be able to do it (to buy a first home).”
He said having a high loan-to-value ratio – the amount of money borrowed compared to the value of the property – does not always means bad risk.
The parent assist loans means the parents are not guarantors and are not gifting the money to the child as it must be repaid.
An interest rate that is half the rate of the home loan rate applies to the loan.
Soaring house prices have continued to squeeze entry-level buyers out – residential property prices nationwide rose by 6.9 per cent in the year to March.
In Sydney they climbed by 13.1 per cent and Melbourne 4.7 per cent.
But consumer finance expert Lisa Montgomery said intertwining a first-home buyers’ purchase with their parents put extra pressure on them because they could be left with massive property debts of up to 100 per cent of the home’s value.
‘Borrowing 100 per cent of the home value’s means that if we do have a levelling of the property market you could really not be creating any equity for yourself,” she said.
‘You could even end up with negative equity depending on what prices do and where you buy.’
RAMS offers a loan that allows first-time buyers to borrow the full purchase price by using a parent or sibling as a guarantor – they use their own home as security so first-home buyers default the guarantor is held responsible.
But RAMS head of product Nathan McMullen said customers who do take on these loans need to fit ‘strict criteria.’
‘Arrears rates are significantly lower on these loans than for comparable loans without a family guarantee,” he said.
St George Bank also provides a family pledge loan which allows parents to use their own home’s equity to provide additional security for a portion of the child’s loan amount.