With a Federal election looming, housing affordability (or lack thereof) has become a hot top again. With the median price of a home in Sydney now topping $1M, investors have poured in for the low tax environment on capital gains, and numerous tax breaks known as ‘negative gearing’ to render any rental income virtually tax free and indexed to inflation. This against a sharemarket which has still scared many away after the days of the 2008 GFC, and returns on fixed rate investments such as term deposits at historical lows, and plenty of foreign investors (particularly Chinese) keen to get their money off-shore, and it’s no wonder that Sydney is now second on the list of most unaffordable housing on the planet. (Source: news.com.au).
In this post, I’ll explore the top 5 ways I’ve encountered that can assist potential 1st home owners to turn the tables somewhat and break into the market.
A monetary gift from the parents
Whilst this must seem like a ‘no-brainer’, until fairly recently, most lenders would only accept all genuine (or at least a substantial percentage of) savings as a contribution towards a home purchase. The rationale behind this was that the discipline required to save a substantial deposit made the borrower a ‘safer-bet’, and also, the deposit then didn’t need to be treated as an additional liability (ie as if it would have to be paid back). However these days, a combination of high home prices, and a baby-boomer generation with superannuation and other investment savings behind them, lenders have been forced to allow for these situations. Usually, the lender will insist on a declaration or letter from the family member stating that the funds are a gift and won’t be called upon to be repaid at a later date.
House Swap
No, this isn’t the title of a new reality television program! I first came across this idea in Paul Clitheroe’s Money Magazine many years ago, and it stuck with me ever since for its simplicity and logic. It’s a version of the ‘if you can’t beat ‘em, join ‘em’ philosophy. Since investors get a variety of benefits ie tax deductions, rental income, and CGT discounting, then why not structure your own version of an investment property – that is, team with a friend or relative and purchase each other’s property ie your friend buys house A (the one you want to live in), and you buy House B (the one your friend wants to live in). You each get to live in the house you want, but can also claim the benefits associated with an investment property. Plus, you get a tenant you can trust (hopefully!). To my mind, this scenario would work best if you were looking at apartments in the same building. Basically identical, the only difference being you don’t live in the one you own.
Purchasing in Partnership
This idea seems to get an airing every time issues around affordability raise their heads. By going into a partnership with a non-spouse, such as a sibling, friend or relative, you can combine your deposits into a larger one and combine your income to repay the loan. The title can be structured into what’s called a ‘tenants-in-common’ arrangement or even into a type of share arrangement. You would need to consult with a lawyer to formulate a partnership agreement and also the title arrangements – that way, things such as what you can do if someone wants to sell/exit the arrangement etc can be considered up front.
Parental Guarantee
These days, many baby boomer parents are living in valuable assets with plenty of equity. In lieu of a cash gift, some lenders offer the option of parents supporting their children’s move into the property space by allowing them to use the equity in their home to guarantee the 20% of the purchase price usually required by the lender to avoid LMI. Of course, you will still need to be able to afford the loan repayments, as parental income is not considered as part of the loan repayment assessment. However, the parents (as limited guarantors) will usually have to demonstrate that their own financial circumstances are sound.
Lenders Mortgage Insurance (LMI)
Some lenders will fund up to 85% of the purchase price without requiring LMI. For certain professions eg Doctors, dentists – some lenders will even lend up to 90% (and higher in some instances) without requiring LMI. For those outside that, however, you do have the option of paying the LMI to allow the lender to fund a higher percentage – in some cases, up to 97% of the purchase price.
For further information on any of the above (or any other lending questions), please get in touch via our Contact Us page or call us on (03) 9822 2994 or (04) 1255 6627. And if you found this article useful, please share with your friends.
Disclaimer
The information contained in this article contains general advice, not financial advice, and does not take into account your personal circumstances or requirements. For personal financial advice, please consult your Financial Advisor.
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Hellow my name is Martinhag. Wery proper article! Thx 🙂