The property market can be a hard nut to crack, especially for the next generation of young home buyers. Gen Y have been accused of frivolous spending and living at home with their parents for extended periods but the generalisation certainly doesn’t apply to all. For the sensible Gen Y that are looking to buy their first home, with a little help from their parents, they can.
Family home loans are springing up and gaining in popularity as the market squeezes a lot of young people out. Home loan options are slim for the young and single and with rising housing prices, the mortgage repayments are out of reach for most.
Here is where the parents of Gen Y are called in to assist and give their children the best chance at owning their own home.
What is a family loan?
Banks, credit unions and mortgage lenders have seen a strong demand from Gen Y to get into the market and answered the call with a range of family home loans. A family home loan allows parents, family members or others willing to help, use the equity in their homes as security for a portion of their home loan.
This option allows Gen Y to get into the market sooner, reduce or avoid paying hefty lenders mortgage insurance and can also expand the amount they can borrow, in some cases allowing them to borrow up to 100% of the purchase price.
What happens if they default on loan repayments?
If they default on repayments their parents, or whoever has gone guarantor on the loan, will have to take over the payments. If the guarantor agreed to guarantee a fixed amount of the loan and they default, they are then responsible to pay off that portion of the loan. Likewise, if they have gone guarantor for the total loan amount it then falls on them to pay off the entire outstanding amount. If they can’t pay off the loan, their parent’s assets that were put up for security, which might be their home, will be sold to pay off the outstanding loan amount.
It is therefore imperative that any Gen Y that is considering buying their own home, with their parents as guarantor, have the earning capacity to make the mortgage repayments, have a substantial amount of money saved for a deposit and do not overextend their budget.
They don’t want to risk putting Mum and Dad out of their home by failing to meet their repayments. While this may be the only viable way for them to get into the property market they need to make sure they are in a good position to buy and pay off their own home loan.