Posted on 2017-12-04
Parents helping their children enter the property market is on the rise. Property prices are increasing at a higher rate that wage growth, so it’s no wonder parents are stepping in try help lift the burden of saving for a deposit.
A recent report by the MFAA (Mortgage and Finance Association of Australia) reveals that up to 1 in 6 first home loans written by brokers are guaranteed by a parent.
While guarantor loans are popular, read more about them here (link to guarantee loan blog post or page), there are other options.
If you parents have owned their home for a while, it’s likely they have accumulated a good amount of equity. This equity can be used as a deposit to help you buy your first home without needing to save for many years.
Equity means what you own. When your home equity is calculated, it actually reveals how much of a home you own outright. For example, if a home is worth $800,000 and there is $200,000 left on your mortgage, there is $600,000 of equity in that home.
The process of releasing equity can be done by refinancing. Refinancing involves taking out a new loan, usually a more competitive loan, and paying off the previous loan. In this process, a broker can help you release a portion of your equity in the refinance. In the equity example provided above, the homeowner could even gift up to $100,000 from their equity towards their child’s first home. This one-off payment from a parent can really give a first home buyer a leg up in the property market.
Parents who want to gift equity need to refinance. Once they have refinanced they can give the cash out amount to their children as a one-off gift. For legal purposes, it is a requirement for the parent (or individual gifting the equity) to formally put in writing that the funds are a gift they do not wish to be repaid. This avoids conflicts.
And that’s it.
Your parents aren’t immediately out of pocket, chances are they have a better loan after they refinance, and all of a sudden the deposit that once felt so far away, could be in your hand sooner than you thought.
Chat to our experienced team of brokers who can give both you are your parents the information they need to make the right choice.