(Pictured: Chris Andrews)
With first-home buyers dropping to a record low of about 12 per cent of all residential property buyers in the past five years, parents are increasingly stepping in to help their children in the process. But there are potential pitfalls which one fund manager is looking to alleviate.
Credit specialist La Trobe Financial has introduced a new service which combines its credit and wealth management services to administer such “P2C” loans without the necessity for bank guarantees and while also protecting the child from problems which may arise through a relationship breakdown.
The parent-to-child loan, which will most typically be for the 20 per cent deposit generally required for a first home loan, is made through the security of La Trobe’s “select” or “high yield” investment options in its $750 million mortgage trust. These options allow for the full repayments of interest and principal, if required, to go direct to the lender, after the manager’s administration fee. The lenders (parent) can dial up or down the interest rate they want, although La Trobe is advising a minimum of CPI plus 0.5 per cent.
Chris Andrews, La Trobe’s head of funds management, said that, in researching the new service, La Trobe noticed that many parents did not formalize their financial support and, rather, quietly gifted the money.
“However, from an estate planning and wealth protection point of view, this leaves the gifted monies at risk in the event of a subsequent marital or deceased estate dispute as the gift is not repayable,” he said.
The service is designed to protect the parents’ investment without exposing the assets or credit file profile to any risks associated with the child running into repayment difficulties. La Trobe, which is also a mortgage lender, can either lend the bulk of the money or will accept other lenders, at the clients’ discretion.
First-home buyers have dropped from a peak of 31.4 per cent of all home buyers in 2009 to 12.3 per cent this year, with investors pushing prices up in capital cities such as Sydney and Melbourne and, therefore, making the plight of first-home buyers that much more difficult.
NOTE: the author is a consultant to la Trobe Financial.