La Trobe Financial’s innovative loan option that’s making the Australian dream still possible
Owning a home is a cultural rite of passage in Australia, but this financial achievement has become increasingly out of reach for most young adults.
According to a recent housing report from the Committee for Economic Development in Australia (CEDA), the median real house price has almost quadrupled since 1970, while annual wage growth continues to deflate, hitting a record low of 1.9% earlier this year.
Giving up avo on toast for breakfast every Saturday isn’t going to make up for this massive shortfall, so there’s no wonder that strapped-for-cash young Aussies are turning to their parents for help.
The ‘Bank of Mum and Dad’ has lent around $65bn to its children, making it the fifth-largest lender in the country after the major banks, research from financial comparison site Mozo.com.au has found. The study surveyed 1,002 Australians and found that one in three families have offered financial assistance to their children, and yet the majority – 67% of parents – don’t expect to be repaid.
While turning to mum and dad for financing may seem like the easiest and most logical option, it’s not always a foolproof plan. Leading non-bank lender La Trobe Financial offers first home buyers a much-needed alternative. It was ahead of its time in 2014 when it created the Parent-to-Child Loan (P2C), a combined credit and wealth management product designed in response to the growing housing affordability crisis.
It remains the only product on the market that formalises and protects parents who provide financial assistance to their child without putting their own credit record at risk, or requiring a personal guarantee where they’re using their own home as security.
Many parents want to help their children get on the property ladder, but they may feel uncomfortable about handing over such a large lump sum as a gift. Furthermore, gifts do not count as genuine savings, and lenders will require at least a 10% genuine deposit when assessing any home loan application.
“As a lender known for innovation and focusing on underserved markets, P2C was a logical product development for us. The response to P2C has been very encouraging and extremely rewarding,” says Cory Bannister, vice-president and chief lending officer at La Trobe Financial.
With the property investor
market being subdued by regulators, it’s a smart idea for brokers to look to other segments to replace that business and to prepare in case of further restrictions.
There are both short-term and long-term benefits for brokers who deal with first home buyers, Bannister explains.
“In the short term, they fill a void left by other segments, and the long-term benefits begin by establishing a client relationship early in the credit life cycle. That is likely to provide many additional opportunities as the FHBs mature in their credit requirements – breeding plenty of repeat business.”
“Many parents are choosing the benefits of providing a loan directly to their child to assist with the purchase. This is often the best option for parents” - Cory Bannister, La Trobe Financial
How does P2C work?
The P2C loan is based on the same model as the peer-to-peer loan. In this case, the parent is investing in their child’s loan. This can range from a partial amount to the full amount of the loan, and is often anywhere from $50,000 to $500,000. The parent does not take a share of ownership in the property.
The parent gets to set the dollar amount, the loan term (up to 25 years), and the initial interest rate (a minimum CPI + 0.5% is required) on the money they invest in La Trobe Financial’s independently managed Credit Fund. La Trobe Financial disburses the funds to the child and collects repayments.
As long as the child makes their requisite loan repayments, the parent will receive a portion of their money back each month. La Trobe Financial deducts a 0.75% per annum management fee from the investor’s return and charges the borrower a $15 per month fee for managing the loan.
Since the parent’s contribution is secured by way of a registered mortgage, they have rights to the money at all times in the event of non-payment by the child or following a marital or deceased estate dispute.
There are protections in place for the child as well. They cannot capriciously be evicted, nor can their rate be changed by their parent in the case of a family feud, as the P2C loan is managed independently.
The contribution can be made individually, collectively with other family members, or via company or family trusts. This allows parents to help make their child’s dream a reality, while protecting their own investment and potentially saving their child thousands of dollars in lenders mortgage insurance by allowing them to purchase a property with the minimum deposit.
Prior to this being available, parents had to guarantee the child’s loan or co-purchase the home, placing their own home and retirement savings at risk. This also meant that the child missed out on the First Home
Owners Grant and stamp duty concessions.
“Increasingly, many parents are choosing the benefits of providing a loan directly to their child to assist with the purchase. This is often the best option for parents, as a loan is more transparent and will tend to give parents greater security in the event things go wrong,” Bannister says.
This sort of secure intergenerational wealth transfer remains more relevant than ever, as the Mozo and CEDA studies show.
In NSW, parents lent on average $88,250 per family, totalling $32.7bn, the most of any state. Victoria and South Australia ranked second, lending around $63,000 per family, according to Mozo.
While extremely generous, this is putting a strain on parents’ wallets, causing many of them to delay their well-earned departure from the rat race in order to help their children.
“We know mums and dads around the country are assisting their children into home ownership, passing on the fruits of their baby boomer labour and prosperity. However, often it is with considerable risk to their ‘investment’, credit record or, even worse, their own homes,” Bannister says. This product benefits those who cannot afford permanently to tie their money into their child’s property, he adds.
Despite maintaining a “fundamentally optimistic view” about Australia’s financial future, Bannister says La Trobe Financial acknowledges the real challenges young adults are up against when it comes to home ownership.
CEDA’s research shows that there’s no quick solution to the housing affordability problem. Demand pressures and supply constraints will likely continue over the next 40 years, particularly in capital cities with booming populations. And if prices continue to increase at the rate they have, first home buyers’ ability to raise deposits will be outpaced and parents will be relied on even more.
Bannister believes this is where brokers can help. “Brokers can step in and show leadership by discussing P2C with their clients, specifically how it protects parents’ investments and benefits the children.”