Security guarantees, co-borrowing, gifts and more – Helping your kids buy their first property (Ep.95)

In this week’s episode, Dave, Cate and Pete take you through:

1. Monetary gifts (it’s better than Christmas!). One of the primary ways a parent can assist their child is providing a lump sum of money to go towards the deposit. The trio explain how this method can be particularly helpful for many first-time buyers who have a strong borrowing capacity.
2. The difference between gifts and genuine savings. Despite your generous gift, a lender may still require evidence of genuine savings before they provide the tick of approval. The trio discuss the optimum timing to give your gift, and some of the perils and pitfalls associated with this approach.
3. Security guarantees – the most popular method of assistance. The Property Planner and Buyer take you through how a security guarantee works, the benefits and why it is the most common way parents help their kids in property.
4. Going in to a security guarantee with your eyes open. If you’ve got equity available in your property, it may sound like a fantastic idea to offer your home or investment as a security. But as with any major decision, there are risks involved, not to mention a mountain of paperwork. The trio discuss the ins and outs of providing a security guarantee and costs, (and steps) involved.
5. Co-borrowing with your kids. The Property Buyer and Professor share their first-hand experience of purchasing a property with their children. They cover off on ownership considerations, caveats and the agreements they’ve made with their kids.
6. The risks of purchasing a property ahead of time on behalf of your kids. Don’t assume you know which direction in life your child will take! They may not want to live on the same street as you, or go to the university you want them to. But that’s all part of life!
7. Education is key. Aside from gifting your kids money or equity, there are many other ways that you can support your kids and give them a leg up on their property journey. The trio share with you the key insights and education they try to pass on to the next generation. And as any of you with children would know, despite their best efforts, it doesn’t always sink in!
8. Support comes in all shapes and sizes. Some parents can’t offer financial support – and that is OK too. It’s a very personal decision when it comes to how we can help our children get onto the property ladder. From open conversations about creating wealth, to starting them young with a good savings regime, and all the way to offering moral support with the inspections and shortlisting of property, parents need to work out what their preferred method of assistance is. Some children need to just do it all for themselves too. But when it comes to advice, the best help a parent can give is to steer their kids into GOOD advice.
9. And of course, our ‘gold nuggets’

Market insights

1. March index results show the largest growth since 1988. CoreLogic property results are finally starting to show what we’ve been seeing on the ground since late last year. Every capital city is increasing full steam ahead. We think the market is only going to heat up further and there’s more to go in this property run. What’s more, we know that data lag creates delayed reporting. Our trio are certain that the record growth is yet to come to light.
2. First time buyers dominating the market. Despite the fact that prices are high, first home buyers have never had it easier to get their first property purchase under their belt. Interest rates are the lowest they’ve ever been, the level of government stimulus and support is at an all-time high and savings are at record levels as well after months of buckling down (and locking down) on savings, particularly in the Melbourne market. As we recall, Melbourne suffered the longest periods of lockdown in our nation and the strength of the market bounce-back is palpable.
3. The bank of mum and dad. Another player in the first home buyer corner is the bank of mum and dad providing their assistance. Parental contributions are averaging more than $89,000, which is an increase of nearly 20 per cent in the past 12 months. $89,000 is enough for a 20 per cent deposit in most of the nation’s postcodes outside Melbourne and Sydney.
4. APRA won’t intervene in the short-term. At the Australian Financial Review Banking Summit held last week, APRA have said that their job is not to regulate the property market, it is to make sure there’s no systemic risk in bank lending. As the media and political pressure increases with property values rising to new highs, APRA may get a tap on the shoulder sooner than anticipated to intervene and help take the heat out of the market.

Resources:

• ‘Like King Street on a Saturday night’: Melbourne buyers in inspection frenzy
• Helping our children into property… two year’s on…
• Our kids financial literacy
• How we can encourage our children to get into property
• How to take the stress and arguments out of home buying
• Goal setting fundamentals for property success (Ep.67)
• Bad credit behaviour – what does it mean and how can it be solved before it’s too late? (Ep.53)
• Why established properties outperform (Ep.48)
• Money management – 7 steps to success (Ep.30)
• How mortgage strategy shapes your ability to hold property and how it can pay off for decades to come (Ep.24)
• What determines your property strategy (Ep.6)
• The critical mistakes of property investment – starting without a plan 
• House hunting is a compromise so target the most important factors 
• The top 5 mistakes property investors make 
• Why short-term investing has long-term consequences 
• How our mortgage strategy helps us to hold properties 
• Mortgage Strategy 101 – Ep 3. Holding Property 
• Five mortgage strategies that can grow your wealth 
• Property Cycle Management – why now is always the best time to buy if it suits your personal economy and you have a long-term property plan (Ep. 12) 
• Why your Mortgage Strategy is more important than your interest rate! (Ep. 9 ) 
• How to succeed with Property and Create your Ideal Lifestyle 
• Mortgage Strategy 101 – YouTube video series. 

Show notes:

• Gift – one of the primary ways that parents help their kids 
• Normally by providing a lump sum of money to go towards the deposit. 
• Could be the difference between having to take out LMI and keeping the LVR at 80% to avoid LMI. 
• A lot of first-time buyers are restricted by their level of savings, not their borrowing capacity, because they don’t have debts or kids to factor into affordability. Gift from the parents will speed up their ability to get into the market. 
• What is the difference between a gift and genuine savings 
• Genuine savings is your own proven savings over a period of time. 
• What you need to do, the person who provides the gift needs to sign a stat dec that it is a gift and not a loan. 
• If a lender needs to see genuine savings, they expect to see it over a period of time. Dumping money into an account and withdrawing it out straight away is something the bank is cottoned on to. 
• Banks normally check over 3 months of genuine savings – so if you are getting a gift, get it well in advance. 
• Purchasing a property on behalf of your kids 
• But don’t get ahead of yourself. 
• Within 5 years, we need to work out – either I’m buying you out, you’re buying me out or we’re selling it. 
• It’s just fuelling the property market – get money from the bank and also from mum and dad as well. 
• Security guarantees – the most popular method 
• A security guarantee is a type of guarantee where the guarantor provides real estate as additional security for the borrower’s loan. 
• Eg: your kids loan will be secured by the property they purchase AND your property. 
• Usually would be 80% of the value of the property they purchase, then 20% plus stamps secured against the parents property.  
• Benefits of the security guarantee 
• Avoid or reduce LMI by having additional security 
• Parents do not have to provide cash reduce their available funds buffer by contributing cash/money 
• Leave’s a bigger available funds buffer for your child, as they don’t have to contribute the same level of cash to the loan – they could borrow full purchase price plus costs, provided that the guarantor property has enough equity/they can service that level of debt 
• Liability of debt falls on borrowers, not guarantors 
• Bank policy considerations 
• Banks prefer investment property as security rather than home: 
• Or at least guarantors to be Full time permanent employed 
  • Banks don’t want to sell a retirees home from under them (except BoM – they are pretty lenient/loose) 
  • If the property you are offering as security has a mortgage, the property must have enough equity available- your property will need to be valued. 
• Cons of security guarantee 
• The whole property is at risk in the event of loan default 
• Time/effort: 
  • Providing your financial details to your kids mortgage professional 
  • Completing lender identification requirements 
  • Conduct valuation on the property. 
  • Locating the certificate of title if the property is unencumbered OR if the property has a mortgage, you need to liaise with your current lender as they need to provide consent to a second mortgage. 
  • Signing guarantor documents issued by the lender in the presence of a solicitor. 
• Cost:  
  • Guarantor’s need to receive independent legal advice – the bank will not proceed with the loan until this has been done and signed off on by the solicitor. 
  • Partial discharge fee $350 to release the guarantor security. 
• Co-borrowing with your kids 
• When it’s with your child, a joint purchase won’t necessarily work well. You could go in as tenants in common – you can play around with the ratios and also your portion is dealt with in your will (it doesn’t automatically go to the surviving owner). 
• You want to be in a pretty strong financial position is if you take that path.  
• You will be jointly and severally liable – your borrowing capacity will be reduced.  
• How you can help on the education journey 
• Financial literacy 
• Informal education – involve the kids in the property investment portfolio, talk about it at the dinner table, used to take them to open for inspections.  
• One of the biggest problems is keeping kids away from new properties – all your life, you’ve been buying new things – new phone, new toys, new gadgets.  
• Money management: saving for a deposit, budgeting, being responsible for their own finances, property assessment expertise.  
• Start investing young 
• Repetition of right investment and money management – developing the right mindsets and habits. 

David Johnston- The Property Planner’s Golden nugget: The bank of mum and dad has about $34 billion in loans, making it the nation’s ninth-largest residential mortgage lender and bigger than HSBC, AMP and Bank of Queensland. People are wondering how they can protect their gifts in the event of divorce – the way to ensure a gift remains belonging to its initial recipient is to draw up a binding financial agreement, or a prenuptial agreement which are legal documents.

Peter Koulizos – The Property Professor’s Golden nugget: be a good role model. Teach the kids as much as you like, but what will be of greatest influence is watching you, and your attitutde towards money. Are you a good saver or does money come in or come out? Acting as a good role model is one of the best ways.