The bank of Mum and Dad is the 9th largest mortgage lender in Australia, according to the Australian House and Urban Research Institute. With an increasing number of first-time homebuyers seeking family support, a staggering 60% now rely on their parents or grandparents to step in, a significant jump from the 12% reported in 2010 by the University of Newcastle. These factors, combined with historically low wage increases, means that Millennials and Generation Z will rely on the wealth of previous generations for financial security more than any generation before.
This article will show how a Reverse Mortgage, coupled with the government’s First Home Guarantee Scheme, can be utilised to help the future generations and ensure they are financially secure in these financially uncertain times.
Currently the most common way for a parent to help a child purchase a property is by going guarantor and putting their property up as collateral. This allows the children to buy a property with minimal to no deposit and avoid Lenders Mortgage Insurance (LMI), but if the children have financial issues and cannot pay their mortgage, the lender can come after the guarantor’s property.
However, a far safer way for a first home buyer to avoid LMI is for them to use the federal government’s Home Guarantee Scheme, coupled with a Reverse Mortgage.
The Home Guarantee Scheme allows a first home buyer to purchase a property up to a certain amount with just a 5% deposit, with the federal government stepping in to pay the LMI. The property price caps for each Australian capital and states regional area are in the table below.
Source: Property Price Caps | Housing Australia
With a Reverse Mortgage, a parent or grandparent can provide the 5% deposit. Based on the current property price averages in Australia, the 5% deposit for the first home buyer comprises a tiny amount of the total value of the Reverse Mortgage security property.
Source: The latest median property prices in Australia’s major cities
Historically, in Australia property goes up by an average of 6% per annum, but often this is more. Which means the parent or grandparents’ house is going up by 6% of the total value of the property, which based on the average house price in Sydney is $1,125,553 – making the equity increase of the property $67,531.
At the current Reverse Mortgage average interest rate of 9%, the interest on the loan is only $4,050 for a property in Sydney. Furthermore, the child or grandchild who has been assisted in the purchase are now getting the capital gains of around $54,000 on their newly purchased property and are saving an average of $30,000 per year on rent.
There are many ways to then pay out the Reverse Mortgage if desired. If the parent or grandparent wants, they can repay the Reverse Mortgage themselves through voluntary repayment. When the child has acquired enough equity in their property, they can then refinance and potentially pay out the Reverse Mortgage – or they can simply wait and pay it out when they inherit the property.
For a loan of $45,000, a property values at $1,125,533 after 15 years. If there are no repayments the balance is $171,351, but if the property only goes up by 3% p.a. the house is now worth $1,753,544, leaving the family over $450,000 better off.
To find out more about this powerful tool that can not greatly affect the financial security of future generations but also foster a sustainable legacy of wealth transfer within families, visit Reverse Mortgage Finance Solutions.
Image: Getty Images.
This is a sponsored article produced in partnership with Reverse Mortgage Finance Solutions.
