The ‘bank of mum and dad’ is estimated to be collectively worth about $35 billion, making it the nation’s ninth-largest mortgage lender. Thanks to our mum and dads out there, it is estimated that over 60% of first home buyers in Australia are receiving financial help from their parents on their home loans, either through gifts or being guarantors. Although it is fantastic for you to be able to help your adult children enter the property market, you do need to consider your future financial position as well. Because we all know the only one constant is CHANGE! Realistically the game plan should be for you to be removed as guarantor as soon as possible when your kids reach their first financial milestone of having a 90% or 80% Loan to Value Ratio (LVR). This means that as soon as they have enough equity to be able to finance the property on their own two feet, they should. Please note however, if the LVR is not 80% or under, your children will have to pay Lenders’ Mortgage Insurance (LMI). It does come down to everyone’s personal situation, but the unwritten goal is to plan to be removed as a guarantor within two to five years depending on a range of factors. Within two to five years: • your children should be paying down the loan as quickly as they can • any additional income, spare cash, bonuses or windfalls should go towards paying down the loan, and • the property should have seen some capital growth. Keep in mind the guarantor is not removed automatically and must be done through refinancing. You will need to apply for a loan guarantor release, otherwise it will stay in place for the life of the loan. Remember a lot can also happen in a few years. If we look back five years, I don’t think anyone would have predicted the many factors that have influenced our economy. We have witnessed environmental disasters (droughts, fires and floods), property and finance industry transformations (lowest interest rates in history and largest property boom), not to mention world issues and the pandemic. Although the kids are over the moon with the help you gave them, some can end up starting a family and being reduced to one income. Some will separate and divorce. Some may want to sell and move to another suburb or state. But what about you – the parents? What are your plans? You might want to move location or downsize, separate and divorce, or reduce your working hours to look after the grandkids. You might also want to continue working on your retirement plans by increasing your own property portfolio for future retirement planning. So it is important to have a game plan.
It always makes sense to start with your exit strategy first and then communicate this with your children. Set some ground rules and expectations.
Removing yourself as a guarantor when the property has an LVR of 80% is relatively easy.
What are the criteria?
Most of the major lenders or specialist lenders have similar policies when it comes to guarantor loans.
You are eligible to remove the guarantee once your kids have achieved the following general requirements:
Repayments in the last six months have been made on time
The loan must be less than 90% LVR or 80% LVR (if you want to avoid LMI)
Their credit history, income, employment and other aspects of their situation must meet the lender’s policy.
Please note that the criteria may slightly differ between the lenders.
Help your kids take responsibility to remove you as a guarantor as soon as possible by passing on our topic sheet below. Use ours or create your own. By having one, it will give you a great place to start having these conversations.
Good luck!
Sources
1 afr.com/wealth/investing/bank-of-mum-and-dad-a-rich-source-for-first-home-deposit-20220223-p59ytj
2 smh.com.au/money/planning-and-budgeting/parents-cough-up-record-100-000-to-help-children-buy-first-home-20220408-p5abza.html