Insider secrets: here's how your kids can improve their chance of securing a first home
With the median house price in Australia rocketing to $852,940* at the start of 2021, the dream of homeownership for those yet to get a foot on the property ladder may seem further away than ever.
Increasingly, parents are being called on to help their children enter the property market, with recent research from Finder revealing one in three young Australians are relying on the Bank of Mum and Dad (i.e. a cash gift from their parents) to save up for their mortgage deposit.
If you're part of the Bank of Mum and Dad contingent, the good news is that your kids can still come out ahead and achieve their dream of owning a home if they're conscious of the most common traps.
Chris Chalouhi, lending specialist from the Resimac Group, reveals insider tips you can share with your kids to help them navigate a challenging market.
Have a discussion about credit
Before setting purchase plans in motion, first home buyers should be conscious of the impact a credit file can have on home loan applications.
Your credit file shows your financial history over the last five years and any loans you've applied for, including credit cards, home loans and buy now, pay later services. Chris suggests first home buyers obtain a copy of their credit file before applying for a loan.
"Be mindful that lenders use your credit file as a scoring system. Getting a copy of this before you apply for your loan can help you understand your financial position," says Chris.
Being aware of the actions that could affect their credit file is also something first home buyers should keep in mind.
"Applying for multiple loans, missing repayments, not paying bills on time or even having an overdraft on your account can lower the credit score on your credit file," says Chris.
Personal credit files can be easily accessed by contacting Equifax directly and requesting a free copy.
"Credit scoring is very common with a lot of lenders. By reviewing your file in all its merits, lenders can make a judgment on proceeding with a loan or asking more questions to understand how they can assist," says Chris.
Major lenders may immediately decline a loan if there have been too many home loan applications in the last six months or if there's a default on file.
If this has happened to one of your kids, they should spend time improving their credit file, which will put them in a better position before applying for another loan.
A common mistake many first home buyers make is only factoring in the property's price tag when setting their budget. As a result, they can sometimes fall short when it's time to make an offer.
Fees such as those for conveyancing and legal, as well as building inspections in the lead up to a purchase must be considered as part of the overall investment. Stamp duty, which is a state government tax payable on certain transactions, should also be factored in, although most states have exemptions or concessions for first home buyers. Lenders mortgage insurance (LMI) may also be applicable if the deposit is less than 20 per cent of the purchase price.
"Being aware of all of the up-front costs ahead of time will help you set your budget appropriately, and understand the price range you play in before you start looking at properties," says Chris.
The deposit isn't everything
Softening the blow somewhat for the unexpected upfront costs is that it's not always necessarily to have a 20 per cent deposit to purchase a home.
"A 20 per cent deposit will certainly expand your choices in terms of securing a loan, but if you haven't saved to that level yet, you shouldn't give up. There are other options you can explore," says Chris.
Supporting kids with a cash gift to supplement their deposit is an avenue that an increasing number of parents are following, but it's worth bearing in mind that many lenders have restrictions around this.
"Most major banks and lenders require that deposit funds have been in the borrower's bank account for at least three months when they have less than a 15 per cent deposit, which means their purchase plans may be delayed if they're relying on any cash gifts, inheritances or first home owners grants."
For buyers who have less than a 20 per cent deposit, or who are relying on 'non-genuine savings', Chris suggests looking for specialty products that are specifically designed for first home buyers. QuickStart is one such product that supports deposits of as little as five per cent from multiple sources, like grants or the Bank of Mum and Dad, and also enables buyers to borrow a portion of the lenders mortgage insurance in their loan to reduce their up-front costs.
QuickStart provides much needed assistance to those faced with the challenge of saving a large deposit and can significantly increase purchasing power.
Put your best foot forward
A strong income doesn't necessarily mean approval for a loan. Lenders will assess overall financial position, taking into account assets and income, as well as any debts and liabilities.
"A lot of lenders look at your living expenses and count your one-off spends as a monthly expense," says Chris.
Chris suggests considering all options when it comes to credit cards. While it may not be necessary to cut them up, look at lowering the limit and make sure all existing debts are paid on time.
Showing consistent savings will also help present a financial situation in the best possible light, especially with less than a 15 per cent deposit.
Finally, Chris advises doing research into the whole application process before applying to have the strongest position possible and avoid nasty surprises along the way.
"Figure out how much you want to spend, the deposit you have available and what the end goal is. Be prepared to provide documents and have a look at your credit file to be in the best possible position before applying for a home loans," concludes Chris.
*Source: Marsh, S. Australia's average house price hits record high as buyers flood market post-COVID [web article], 28 Jan 2021. 9news.com.au, (accessed May 2021).
The opinions expressed in this article are the opinions of the author(s) and not necessarily those of State Custodians. The above is general commentary only and is not advice tailored to any individual's financial situation. We recommend seeking advice from a finance professional before implementing changes relating to your finances.