First home buyers are scrambling like buffaloes over a croc filled river to try and secure a property before prices climb any further out of reach. Unfortunately for most, the struggle to get traction on a sheer, river-bank-like deposit is holding them back from coming out the other side.
However, there is a ferry that crosses the river, and it’s driven by your parents.
If you can get your folks on the hook as guarantors, the bank manager will be only too happy to sell you a ticket to ride. That’s because they can get you parents to fork out in your place if you hit the skids and start missing repayments.
Hell, they’ll even be able to sell your parents’ house to get the money back if they need to.
But that makes it all sound a bit morbid. Guaranteeing a loan doesn’t get that heavy unless you bugger things up, and even then it’s possible to limit the amount your parents will be made to pay.
You see, you can arrange for a guarantor to secure as much or as little of the loan as they like.
Usually you’ll be after a guarantee for at least 20 per cent so that you can avoid paying lenders mortgage insurance. Once this amount has been paid off the loan, their guarantee can be discharged and they’ll be free to keep fluttering your inheritance away.
And before you think you folks’ wallets are a bit too skinny to go guarantor on a loan, keep in mind they just need to put down assets, like a property, as security, not wads of cash. And fortunately our parents, the ‘baby boomers’ are actually property moguls in disguise, hoarding houses like its nobody’s business.
According to a recent Grattan Institute study, 80 per cent of 55-64 year olds own their own home, and 82 per cent of people aged 65-74 own their own home. These same groups hold an average $191k and $151k in investment property per household, respectively.
So while everyone’s situation is different, the average baby boomer couple certainly has the assets to get you over the croc infested waters, you just need to fit them with a captain’s hat. Here’s how.
1. Make a smart pitch
You’ve got to present a worthwhile case for your parents to put their own property at risk, so get your pitch prepared before asking the big question of them.
At the heart of every convincing argument is a good plan, in this case, a business plan. So get your elephant gun out and fill it with research on the pros and cons of property investment, the expected returns you’ll earn and a budget behind how exactly you’re going to afford the loan repayments.
Take it seriously, be through and keep it professional. No whinging.
Backed up by a good business plan, you’ll be in a great position to make a slick pitch and field any prickly questions they have about the arrangement.
2. Treat it as a joint investment
You might find that your folks are keen on a property investment too, which means you can approach this as a joint venture. You buy what you can afford and they go in for the rest.
If you don’t plan to live in the property, this can open up some handy tax benefits that could make it more affordable.
If you do go down this road with your parents, you’ll need to have clearly defined investment goals that align with each other; decide how much each party will pay for rates and repairs, when you expect to sell and what happens if one person wants or needs to sell early.
You should also run your plan by a tax accountant and conveyancer to sort out the fine print.
3. Dial back the risk
Make sure the guarantors get their own independent advice, only ask them to guarantee what they’re comfortable with and, above all, make sure everybody understands what they’re getting themselves into.
For you, that means ensuring you’re prepared to hold up your end of the deal. Don’t forget to give yourself some room to move if unexpected expenses crop up, as they love to do. Take your time to get these things sorted before signing up to anything, and advise your folks to do the same.
Then, if the numbers work and they’re comfortable buying into your property pitch, book an appointment with an accountant to board that ferry across the river.
Image: Steve Corey, Flickr