Most people would prefer to get into the property market sooner rather than later, and for good reason. Investing in property is like investing in anything else – the longer it takes to get in, the less financial reward you reap.
The sustained rise of property prices most notably in Australia’s capital cities, has continued to stretch home buyer’s affordability parameters and has led to this modern property investment strategy.
Saving the full 20% deposit for a home loan is no easy feat, so we’ve compiled some strategies available to consumers who want to get into the market sooner rather than later..
Rentvesting refers to the strategy of investors purchasing a property in more affordable parts of the city or in regional areas and rent that property out whilst remaining as tenants in their current location and maintaining their current lifestyle.
This strategy allows the investors to the property market sooner by reducing the initial savings and borrowings required to enter the property market. At the same time its provides comfort in maintaining their currently living arrangement and lifestyle whilst gaining access to the investment property market.
Seeing as the debt is for investment purposes, the interest repayments are an allowable tax deduction, against owner-occupier mortgage the debt is personal and non-deductible
This strategy allows ability to build equity in an investment property which can later be used to purchase an owner-occupied house in their desired location.
- Family Guarantee
A family guarantee means using the equity in a property as security for your another family members home loan (usually parent to child relationship). It can help a first-home buyer to secure finance for a property they can afford, but may not have a large enough deposit for, and to avoid the added cost of lenders mortgage insurance.
The guarantor allows the equity in his or her own property to be used as additional security for the loan. The primary security for the loan will still be the purchased property, but the lender will also take a mortgage over your guarantor’s property also. This mortgage will not support the loan directly but will be used to support a guarantee from your guarantor.
There are other advantages as well. “By guaranteeing a loan, you’re helping your child enter the property market sooner,” Justin Mcilveen, Director at Scarlett Financial explains. “Also, your child may be able to buy in a more desirable location and a home that better suits their needs. If they did it on their own, they may need to go further out of the city or perhaps settle for fewer bedrooms.”
There are shortcoming to consider though. Guarantors are generally limited to immediate family members. Normally, this would be a parent but guarantors can include siblings and grandparents. Some lenders will allow extended family members and even ex-spouses to be a guarantor to a loan, but this varies depending on the lender.
What are the implications for the guarantor if the borrower cannot pay back the loan?
If you’re unable to pay back the loan according to the terms of your contract, the lender can take legal action against you, and in some circumstances, your guarantor. Your guarantor will be liable for the amount specified in the guarantee. Anyone who is considering being a guarantor for a property loan should seek independent legal and financial advice before accepting the role. Most lenders will insist on this, prior to accepting a guarantee.
It is also important to note that a guarantor’s ability to borrow will be reduced after they have agreed to act as a guarantor.
- Property Share
Property Share allows you to split the cost of buying a home with family and friends, while retaining individual control of your finances. Each borrower is set up with their own loan and access a range of features including redraw facilities, mortgage offset accounts and lines of credit – that they need without affecting the other borrowers on the property
This allows you to Pool your money with friends or family to buy your first home, or enter the market as a property investor, as well as buy the property you want, rather than settling for a cheaper option.
Property Share allows you to Split the costs of your home any way you like and let each borrower decide how they want to manage their loan repayments
Each borrower must must prove servicing for their own loan facility and must always guarantee each other’s loan(s) (security support only), should one borrower be unable to repay.
- Other investment options
If none of the above options are viable to you, you should still investigate other investment options.
A Scarlett Financial planner can steer you into alterative investment options – direct share, managed funds – which can help build your wealth in the meantime.. Shares and securities are a cheaper and easier way to get into investing; available at any price point you; and allow you to buy and sell your stock (and obtain your funds) anytime you like.
Investing in these products allows you start to build an investment portfolio that can support a house deposit once grown. With interest rates at record lows, bank interests on savings accounts are providing returns less than CPI, so you are actually losing money by relying on these for wealth creation.