The median price of property has been rising so quickly in Sydney and Melbourne that many young adults worry they will never be home owners.
The housing affordability issue isn’t just about home prices. There are social and generational factors because today’s young adults are less likely to be savers.
So even as home-loan interest rates are at their lowest in more than 50 years, affordability is as much about a lack of a deposit as an inability to service repayments.
Luckily, there are options for borrowers who have decent incomes and low deposits, and it’s even easier if you have supportive parents.
Recent research of more than 6000 people by Yellow Brick Road showed that many parents want to help their children to buy property. If that is something you hope to do for your kids, these are the options.
First, most lenders will consider a family guarantee in lieu of a saved deposit. If you’re buying a $500,000 property, need $100,000 deposit and your parents have built substantial equity in their own property, they can offer it as security for the deposit.
A family guarantee works when the deposit is as least 20 per cent of the purchase price. The lender accepts this security as the deposit, but the borrower is responsible for the mortgage repayments. If the borrower defaults, the lender recovers costs by selling the property, and they can take any shortfall from the security offered by the parents.
While this form of deposit-financing has increased by about 30 per cent in the past five years, many home owners don’t want to risk losing their property wealth if their son or daughter fails to make mortgage repayments.
This leads to another option: the non-refundable gift. If a parent wants to help their child buy their first home, while keeping their own property high and dry, they can give a sum of money to the borrower and sign a statutory declaration that the money is a gift.
Lenders, generally speaking, don’t allow these deposit gifts to exceed 50 per cent of the deposit. The other half must be savings of six months or more, so the non-refundable gift is a good way for first home buyers to double their deposit, and the parents can help without putting their own retirement plans in jeopardy.
Be aware that the ability to save a deposit counts for a lot with lenders, and where a borrower has low or no savings, the lender will scrutinise their income and their serviceability.
This situation can be looked at from another perspective: that instilling good financial habits at a formative age is a good investment. The combination of high income and low savings is no way to build financial security. The key is to save some of your income, so you can turn it into hard assets. This is something worth teaching children, especially given the number of consumer temptations foisted on young people.
If you’re a first home buyer who won’t get parental help with a deposit, save hard and buy the property you can afford, not the one you want.