14 Aug The bank of Mum and Dad – Melissa Gielnik
MFAA Director Melissa Gielnik tells us about a spike in parental guarantee loans. What are they you might say. Melissa explains.
Kevin: Gee, we’ve heard a lot lately about how unaffordable property is, but we’re also hearing that the older generation – that is, maybe the parents or grandparents of people who are currently trying to buy a property – are among some of the most wealthy in Australia. Well, it just could be that the housing affordability issue that is gripping the nation for first-home buyers may just be improving through something called parental guarantees.
Many parents who have built up equity in their home are ideally placed to help their children – or grandchildren, even – move up the housing ladder much sooner. Parental guarantees are the loans of the future and can be an excellent affordability housing solution for young buyers according to Director of the MFAA and Managing Director of Smart Lending, Melissa Gielnik, who joins me.
Melissa: Hi Kevin. How are you?
Kevin: Thank you very much for your time. I’m great, thanks.
Tell me firstly, what are parental guarantees?
Melissa: As the name suggests, it’s a home loan where the family guarantees the applicant – so the younger family member using their property. Kevin, this is a limited liability loan. What that means is, the parents are limited to a dollar amount, an actual value. The loan is actually a win-win for both. The parents actually get to have a dollar value as a guarantee and the applicant gets their property.
Kevin: These parental guarantee loans have been around for some time, but I understand now that there are more financial institutions offering these as an alternative.
Melissa: Yes, there are. The market for this type of loan has really grown, being that it is a loan of the future. It’s really taken off. It’s quite heavily promoted now. It’s an alternative to applicants having to save a deposit, but also for the ones who have saved, Kevin, using a family pledge loan or a parental guarantee means that they can avoid lender’s mortgage insurance.
Kevin: That’s a great bonus, isn’t it? Yes. As the Director of MFAA, I guess you get to see across what really is happening because you’re very representative of what’s happening with borrowers. Could you give us a bit of an idea about how many parental guarantee loans there might be in the market right now?
Melissa: We’ve seen a spike in the numbers. It’s around 15% of the entire market. I can’t give you a dollar value on that or a number value. But about 15% of the home loans written are parental guarantees currently.
Kevin: That’s fairly extensive, isn’t it? Can you give us a bit of an idea about some of the conditions that have to be met by both the buyer and the parents to qualify for these types of loans.
Melissa: There are both conditions and considerations. With the conditions, parents firstly need to own or almost own their home. Equity is the key. The applicants themselves need to be able to service the loan. Parents don’t help service the debt. The applicants need to do that via their own income. Then the applicants must also display and have the financial capacity to pay the loan back. I think they’re the main conditions.
With the considerations, parents must consider whether they want to use their home to help their child, and the applicant needs to consider whether or not they can actually afford the loan and stretch themselves with their budget.
Kevin: Melissa, would you think that the increase in relying on the financial security of parents is a necessary evil, or just an easy way out for first-home buyers?
Melissa: Honestly, I really think it is a combination of both. It is an easy way in to the market. We keep saying it’s the loan of the future because as housing prices continue to rise… In Victoria, for example, an average $400,000 home, a client needs to save a 5% deposit of $20,000. They need government costs of $9500. Mortgage insurance is $13,000. So an average first-home buyer buying a property of $400,000 needs $43,500 in cash. When you look at it in that context, it’s almost becoming a necessary evil.
Kevin: Do you think that the banks are responding here to what they see is growing unaffordability for first-home buyers? In other words, are they trying to be a little bit more flexible in the way that they can by offering these parental loans?
Melissa: Yes, absolutely. I think the key between just adding mom and dad onto your home loan and doing a parental guarantee is the limited liability. Limited liability means that the parents, again, are committed to a dollar value. So should the child not pay their debt, the parents know exactly what they’re up for.
The banks have definitely created that market as opposed to mom and dad using their house wholly and going on the child’s loan. It’s a much better way of doing that. And it does mean that the applicant, Kevin, has to afford and be able to service the debt based on their own income, not mom and dad’s income.
Kevin: That’s a very good point, too. There has been a fair bit of criticism – and we carried it in our show recently, too – from a number of people saying that first-home buyers should stop whinging; it’s not all that unaffordable. Where do you stand in all this? Do you think it is getting tougher for first home buyers? And if so, why?
Melissa: I do. I think just the average price of a home has grown so much. We’ve seen really large rises in house prices. The market has just grown generally. So when you think about perhaps when I bought my first home, I may have only needed $20,000. Now you need $43,000.
Wages haven’t actually risen in accordance with house prices, so it is becoming harder to save. A lot of people already rent, so you’re renting and trying to save at the same time. Most moms and dads own their homes these days. They’re a generation that paid off their debt quite early, and they’re willing to help their children. With affordability being down and parents wanting to help, the family pledge loan makes sense.
Kevin: You mentioned earlier in our chat that about 15% of loans written by some brokers now are these parental guarantee loans. That leaves about 85% of people who can’t actually get one of these loans. What advice would you have for them about getting their foot onto the ladder for the first time?
Melissa: It’s all about save, save, save, isn’t it? It’s all about head down bum up, getting in there, assessing your budget and trying to save as much as you can just to get into the property market.
Myself, I talk to my clients about learning to crawl before you walk. A lot of clients come in and they want to buy $600,000 first homes yet they fit in an affordability range of $400,000. So it’s about first-home buyers adjusting their expectations, saving really hard for that deposit, because once you save once and you get that deposit once, it’s a flow-on effect. You sell, you upgrade, you sell, you upgrade. You don’t need to re-save again. But for the people who can’t do a family pledge loan or a parental guarantee loan, it’s all about saving.
Kevin: Yes, and getting your foot onto the ladder for the first time is the hardest part, but once you’re there you can use things like gearing and so on, which is another subject altogether. The hard part is just getting there for the first time. So whatever you’ve got to do, you’ve got to do it. Once you’re there, you’ve got your start really, Melissa, don’t you?
Melissa: Yes, you do. You really do. It’s all about getting your foot in the door. And for first home-buyers, Kevin, a lot of that is then adjusting their expectation.
Kevin: Absolutely. Melissa, we’re out of time but thank you so much. It’s been great talking to you.
Melissa Gielnik is Director of MFAA and Managing Director of Smart Lending. Some great advice there for first-home buyers. All the best to you, Melissa. Thanks for your time.
Melissa: Thanks, Kevin.