As we are all aware it has become harder and harder for young people to purchase their first home. The struggle of increasing house prices, the level of income compared to deposits required, high rents and the current loan to value ratios imposed by The Reserve Bank have contributed to this. Many younger people believe that they don’t have any options when it comes to purchasing their own homes and don't know how to leave the 'rental trap'.
Things are a bit different now than before. Back in 1975 there was a massive spike in house prices brought about by the end of the Nixon era in the US. Likewise 1987 some places saw interest rates of 20%, making it incredibly hard to buy a house. Yet some sources are indicating that it's even harder to get on the property ladder now.
Back in 1975 the gross individual income was $126.88 a week, at the same time house prices were, on average, $24,300. Based on standard variables (such as a 33% deposit, 15 year mortgage and 9% variable rate) this meant 39.2% of your income went on your mortgage. This was at its worst, the years after saw house prices drop and interest rates lower meaning it became more affordable after this dark time.
In 1987 you required 67% of your income to be servicing a mortgage. Back in 1987 the average house price was $88,900 and the average pre-tax income was $485.98 a week. Assuming the same criteria as before this meant weekly mortgage payments were $246 a week. But again, things steadily got easier.
Fast forward to 2017 and the average annual salary is $48,800, which equates to $938.46 a week pre-tax. According to QV the average house value in 2017 was $631,432 (now up to $677,618 as of March 2018). Assuming a 33% deposit (a whopping $208,372.56!) and the same repayment terms and interest rate, that means a weekly payment rate of $989. That's around 105% of pre-tax income.
So how can your children overcome these challenges? Well, there are a number of ways you can help.
In this article we will explore two of the main issues that might be making it tough for first home buyers, and how help from parents can overcome this.
1) NOT ENOUGH DEPOSIT FOR A MORTGAGE
Some banks are allowed to issue mortgages with only a 10% deposit, but this number is small and it's more common to get better rates of you have the full 20% deposit on hand. In this case the shortfall of your child's deposit may be able to be made up by the equity in your house. This means that no funds actually exchange hands, however a mortgage is registered by the bank over your house, with a guarantee for the shortfall of the deposit.
Sounds confusing? – every situation here is different. You may need a guarantee for the whole deposit amount or even just a small part of it. This is why it is important to discuss your options with a trained mortgage broker, that way they can explain this from a bank's perspective to both you and your child who is looking to borrow. You will of course need to get independent legal advice to make sure everyone understands the process.
Once there is 20% equity in the property bought by your child, you can then apply to have the bank remove the guarantee. This means that either the loan balance has been paid down, or the property value has gone up, or a combination of both.
Another way of increasing the deposit, is to gift your child a cash sum. If they are fortunate enough to receive this the bank will require something in writing from you stating the funds are a gift. A mortgage broker can pre-approve a loan conditioned on receiving this gift, so your child can start looking for a house in the meantime.
2) NOT ENOUGH MONTHLY INCOME TO AFFORD A MORTGAGE
The second part that may be a challenge is your child not having enough income, or uncommitted monthly income, to service the loan that they require to purchase the home.
There are many different types of income and the requirements for what is counted as income can vary from bank to bank, which is why it is so important to talk to your independent mortgage advisor. The banks will factor in all your child's outgoings and take them into consideration. This includes any loans or hire purchase payments they are making, student loan payments and generally 3% of their credit card limits. If their debt level/credit card limits are high then the amount they will be able to borrow will be lower.
In this situation it might be an option for you and your child to purchase the house jointly. This means that your income as parents is taken into consideration, along with your full financial position. Of course this will depend on your individual circumstances as to whether it is achievable. You will be liable for the loan also as far the bank is concerned, so it is important you are confident of your child's ability to repay the mortgage amount. A mortgage advisor can go through this scenario with all parties and see whether this is an option. Then depending on the future going forward, it may be an option at a later date to transfer the lending in to just the child's name.
Here at Stephanie Murray Mortgages we have mortgage advisors on-call, ready to discuss your options and what may work best for you and your situation. You can contact us today by following this link.
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This information is general information only and must not be relied upon as legal advice. A disclosure statement is available here.