Ownership structures Part 2: Parental support, shared equity schemes and co-ops (Ep. 204)

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The trio ponder the RBA rate increase decision. Cate points out that while the rate of inflation is reducing, the inflation figure is still “a million miles” above the target band, (in Mike’s words), and our regulators are doing what they can to slow down the rising cost of goods and services; particularly the latter, as Dave points out. Despite the fact that the decision was not what the majority of economists anticipated, we still have some short-term pain to go, in an effort to thwart long-term pain.

Will Mike’s prediction be correct? A lumpy return to growth for the property market? Only time will tell. Cate harks back to the market sentiment index and the indicators that we need to look out for.

Heading into episode 204, our second instalment on the various ways that buyers can purchase.

Family loans are a common helping hand in today’s market. Family assistance is not restricted to just parents, but often financial assistance comes from parent(s).

Dave digests the difference between a genuine gift vs a loan. A loan will impact the borrower’s serviceability when receiving a portion of the funds from a parent in the form of a loan, and lenders usually apply a thirty year loan term to the portion that is funded by a family member. A gift, however doesn’t impact borrowing capacity adversely, yet it requires a few important steps to satisfy the lender, as Dave explains. Genuine savings is a major focus for banks, and Dave sheds light on this hurdle for our listeners and has valuable advice that may come as a surprise.

Security guarantee, (also known as Family Pledge) is another common way that parents can assist their children on the property journey and Cate talks through some of the benefits and intricacies of such an arrangement. Dave talks through the pro’s and cons of this interesting loan product, and shares a great example about a first home buyer client who has $200,000 saved, and is borrowing 106% of the purchase price with the assistance of a parental security guarantee. As Cate suggests, for this particular client, their ability to preserve their cash savings for renovations will enable them to target a renovation project; something that most first homebuyers don’t have a viable chance at embarking on.

How can children relieve their parents of the obligation to provide security? The trio ponder the likely ways that this can occur. And how can parents help children when they have multiple kids?

Shared equity is the next topic that the trio tackle. From state-based to federal initiatives, there are a few options for buyers in today’s market who are keen to get a foot on the property ladder. Mike details the federal scheme and what it means for buyers.

“Instead of buying with a friend, you’re buying with the government”.

Cate asks Dave how owners can get that monkey off their back, touching on the limitations to property improvement activity, buy-back rules and the income thresholds that buyers face in terms of eligibility criteria.

Cate shares her experiences with working alongside clients who have utilised the Victorian state-based shared equity scheme. While it’s quite restrictive, (and not for everyone), there is no doubt that it’s a special opportunity for those who would have otherwise been precluded from the property market.

Co-ops is the last conversation for this episode and Dave explains how a co-op functions. Best described as voluntary, member-led organisations. Common Equity Housing Limited, (CEHL) is the board controlling the co-op, with 25% of the tenant’s income contributing to the cost of the housing co-op. As Mike and Cate point out, the arrangement is contingent on members being aligned. Mike shares the advantages and disadvantages to our co-op arrangement.

Dave chats about the history of co-ops and the benefits on offer for buyers who embark down this path.

Gold Nuggets:

Dave’s gold nugget: If you’re a parent who plans to help a child, or a child who is seeking to get some help from parents…. there is a little bit to think about, so have the conversations early. Initiate conversations well in advance… it will save a lot of time, heartache, pressure and stress. Remember …. genuine savings!

Mike’s gold nugget: There are a number of ways for Aussies to get their foot on the property ladder, and taking into account our capital growth rate in our nation, getting in today could have a much greater benefit for you than getting in five or ten years later.

 

Resources:

Ep. 14 – How to choose a location for investment

Ep. 22 – Why the family home is often the biggest piece of the investment puzzle

Ep. 95 – Security guarantees, co-borrowing, gifts and more

Ep. 115 – How much can I borrow?

Ep. 116 – How to increase your borrowing power

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