According to KnowHow founder Bushy Martin, there’s no better time to help your children secure their first home. Just don’t go ‘guarantor’.
On a recent live ‘Bush Bite’ video on Facebook, Bushy talked about the best ways parents can help their children with secure their first home, without jeopardising their own.
He said now is the perfect time for first-time buyers to consider purchasing or building their first home, with various incentives currently being offered to assist this process.
Increasing property prices and the relaxation in lending laws will also create positive changes in the market.
“You can access anywhere between $10,000 and $20,000 of the First Home Owner Grant. You can access the $25,000 HomeBuilder Grant for properties around the country. And by the way, that’s just been extended by a further three months, and then a further six months beyond that. So, there’s still plenty of opportunity for you to take advantage of that,” Bushy said.
“We’re also seeing there’s still a few places left on the First Home Loan Deposit Scheme, which effectively gives you access to an extra ten grand. You can access your super of up to $30,000 for savings as a tax effective way of doing that.
“Then there’s potential stamp duty waivers and stamp duty reductions in certain states. So, in certain instances, you can get a complete stamp duty waiver, and others you’ll get a discount of anywhere between 25% to 50% off stamp duty. And stamp duty, by the way, is the biggest cost over and above the property. It averages between four and five per cent around the country. So we’re talking thousands of dollars there.
“We’ve also got the Government Guarantee Scheme, where effectively you can secure a loan without lender’s mortgage insurance, which again can cost you thousands if you have to go down that road.”
With these factors in mind, Bushy believes it’s a good time for parents to be thinking about assisting their children to get into home ownership. However, he warned that parents need to be careful to not become a guarantor for their kids.
“One of the traps I think a lot of parents fall for is what quite a few banks and quite a few brokers will offer you, and that’s to go guarantor on the loan against your property. Sounds simple, sounds easy, but there are some real risks and limitations associated with it,” Bushy said.
“Never go guarantor for your kids unless you absolutely have to. Why do I say that? Really simply, while it appears effective in that by going guarantor, most times it avoids your kids having to pay that expensive lenders mortgage insurance and also means they get access to loans that are at a lower rate and a lower cost. But to enable them to do that, what the bank is effectively doing is putting hooks into your home as the parents.
“You may not be aware of this, but that puts you at significant risk because you automatically inherit responsibility for your children’s lives. So, if something happens to the employment of your kids or something happens to their health and they can no longer afford the property, their bank will come and tap on your door.
“You’re putting your own home at risk. In addition to that, what you’re also doing is limiting your future capacity and flexibility if you need to do something. If you want to sell the home and upgrade, or downsize, or you want to invest in property yourself, then because you are effectively responsible for all of your children’s loans by being guarantor, that’s going to reduce what you can borrow if you need to do something yourself in the future.”
So, what’s the alternative solution? Bushy recommended parents instead take out a small, dedicated loan.
“There’s a much better, safer and easier way to [help]. And that is by doing this: Allow your children to do their maximum borrowings in their own right against their new home, and it’s normally up to about 80%,” he said.
“So, you avoid that mortgage insurance and then add the shortfall between what they’ve got in savings. You take out a small loan against your own home or investment properties if you’ve got them.
“Then, you can effectively gift those funds to your children to help form the deposit on their home. And that means that they are totally responsible for the debt. You’re only responsible for that very small loan deposit contribution that you’ve created.
“And if you don’t want to give to your kids, then you can also work out repayment terms with your children so that they’ve actually taken responsibility for and looking after that debt and repaying – that is their first priority, given the huge opportunity that you’ve given them to do so.
“Definitely look after your kids. There’s nothing better, no greater satisfaction than using your hard work to help give your kids a leg up. But be very careful how you do it. Don’t guarantee them. Look at the structure that I just spoke about, and you can both enjoy your future without fear or favour.”
Watch the full Bush Bite video here.
KnowHow founder Bushy Martin shares regular, live ‘Bush Bite’ videos on his Facebook page sharing tips and tricks to cut costs, boost your savings and take advantage of opportunities in property. Connect with Bushy here.
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