Wednesday, August 22, 2018

Lending 

Ten years on from the Global Financial Crisis and Australia, despite the end of the mining boom, it is not doing too badly. But while we escaped the worst ravages of the worldwide recession, we have not escaped the economic flow-on effects. 

Thanks to the low-interest-rate cure for the Global Financial Crisis, investors worldwide have piled into property and shares, and in the process the affordability of housing has plummeted - from Canada to London, Hong Kong to Down Under - and become a serious political issue. 

As a result, there has been a lot of finger pointing. Foreign buyers, especially those from China, have borne the brunt of the blame, but they are only a tiny part of a far more complex landscape that also includes population growth, lack of supply and low interest rates. 

In Australia, most recently, it has been investors who have been under the spotlight: over the past eight years the total value of all mortgages has almost doubled to $1.54 trillion, and nearly a third of that total is made of loans to investors. 

Indeed, as house prices continued to experience double-digit year-on-year growth (Sydney up 20%, Melbourne up 17% and Canberra up 14%) - earlier this year the total of investor loans rose to above 50% of all loans issued. 

Despite the robust nature of Australia's banking system, high investor debt is a worry, especially given the uncertain geopolitical landscape and the spectre of rising borrowing costs. Interest-only loans are a particular worry for regulators, since they are particularly susceptible to any slump in the housing market. 

As a result, banks and lenders have been facing tighter lending criteria. Treasurer Scott Morrison has called for a "reduced reliance on interest-only loans" and the Australian Prudential Regulation Authority - which oversees the banking sector - is about to release further rules regarding banks' investor lending. 

Anybody who has applied for a home loan over the past few months will be aware of these new measures, and investors have faced even more scrutiny.

So, what does this mean for people who want to invest in property? Well, it is not all bad news. While many unprepared speculators will be turned down for loans, for those with solid finances, property investment is still a valid and rewarding option.

Proper market research is vital, so is the help of industry professionals. A mortgage advisor can offer a range of financial products and tailor fit solutions to your requirements. And once the loan has been approved, with fewer speculators in the market, auction activity and prices should cool - leaving you with more opportunity to make a healthy return on your investment. 

 

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It pays to be nice to your Mum and Dad. Yes, they can nag you and can embarrass you in front of your friends. But remember, they also love you and are always there for you... and, if you are lucky, they might also help you move into your first home. 

In a recent survey by the lawyers Slater and Gordon, 26% of Generation Y said they would need some help from their parents to get into their first home. That is great if you have affluent parents and The Bank of Mum and Dad can afford to gift you a generous home loan deposit. 

But even if your parents are not in a position to help you out with a bundle of cash, there is still a way they can give you a financial leg up. If they own their own home, they can help you get you first step on the property ladder by becoming a guarantor of your home loan. 

What is a parental guarantee?

It is when a parent uses the equity in their home as security against a loan taken out by their child. For example, if a mum or dad has $500,000 equity in their home, they can put up part of that - say to the value of $100,000 - to provide their child with additional security value, allowing them to borrow more of the purchase price of their new home. 

What are the benefits:

  • Saving for a deposit can be hard, especially if you are already renting. Using the equity in your parents' house as a deposit means you can skip having to save for a deposit, and can move into your own home faster.
  • If you do not have a deposit of 20%, lenders require you to take out lenders' mortgage insurance (LMI), which covers them if you are unable to meet your repayments. A parental guarantee can potentially mean avoiding or reducing the cost of LMI.
  • As long as you make your mortgage repayments, it does not cost the guarantor anything.
  • Once you have built up enough equity in your home, or have paid off enough of the mortgage, your guarantor can be released from the agreement, as the security is no longer needed, although this might incur fees.

Potential risks:

  • With all loans, there are risks involved. If you default on your mortgage, your guarantor is liable for the entire sum that they have promised to cover, which is the worst-case scenario and could lead to them losing their home.
  • After agreeing to act as your guarantor, your parents' ability to take on further loans for themselves or others will be diminished. 

Of course, as with all financial decisions, securing a parental guarantor is not something that should be rushed into without speaking to the experts. But by doing your homework and working with your trusted mortgage professional, tapping into the equity in a parental house could speed up your move into a family home of your own.

 

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Contact Details

Zippy Finance 

PO Box 3078
North Turramurra
NSW 2074

T 1300 855 022 

Louisa Sanghera is a credit representative (437236) of BLSSA Pty Ltd ACN 117 651 760.  Australian Credit Licence 391237. ABN 85 168 278 975.

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