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Specialist lender La Trobe Financial’s Parent-to-Child (P2C™) product is helping young people make their first step onto the property ladder. Chief lending officer Cory Bannister provides a case study and discusses the ins and outs of the loan.
A young couple had saved a 5 per cent deposit to purchase their first home but were looking for assistance from their parents. We approved a first mortgage loan to 80 per cent LVR for the children, and then provided an additional “P2CTM loan” for the balance (approved at 3.50 per cent per annum) funded by their parents as investors in the La Trobe Australian Credit Fund, saving them a $14,000 LMI premium.
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The parents’ credit rating is not exposed in any way as they have no liability for their children’s loan (no parental guarantee required). The parents will receive a monthly income from their investment as the children make scheduled repayments.
The result: the loan was approved at a combined 95 per cent LVR with no LMI. Loan amounts were $400,000 and $75,000.
Home loans at 3.5 per cent per annum are now available
The concept of parents lending money to their children to help with a property purchase has been around for a long time, however not without the potential pitfalls associated with unsecured lending which can be significant. Our innovative P2C™ product: a combined credit and wealth management product is designed to assist young Australians onto the property ladder and protect families with intergenerational wealth transfer.
The P2C™ wealth product enables parents to assist their children with a property purchase without providing onerous bank guarantees which place the parents’ assistance and wealth in the grip of lenders during a default.
Young adults are living at home longer, finding it harder and costlier than ever to get onto the property ladder. With median house prices increasing nationally and to more than $1 million in Sydney it is harder than ever to afford a starter home – without the assistance of family.
The P2C™ product looks to address the affordability gap between house prices and median income multiples – now at a staggering five times income. The P2C™ product is an attempt to protect parents’ wealth when they do assist their children, and at the same time enable children to enter the housing market without the need for asking mum and dad to put their wealth at risk through bank guarantees, or further mortgages against the parental primary or other residences.
Wealth protection
The P2C™ product formalises the assistance process between parent and child, documenting the arrangement, registering a mortgage on the security property, and then independently managing the assistance for repayment to be in accordance with the agreed terms.
Parents have traditionally gifted monies to their child which can leave them exposed from an estate planning and wealth protection point of view, for example, in the event of a subsequent marital or deceased estate dispute. The P2C™ product is specifically designed to protect the parents’ “investment” from such instances without exposing their assets or credit file profile to any risks associated with their child running into difficulty with repayments. The parents, however, can still provide the much-needed assistance for their children with interest rates starting as low as 3.5 per cent per annum.
Avoid costly Lenders Mortgage Insurance
Parents are able to assist their child with the full purchase amount, or they can assist in part to make up the balance behind the child’s own loan, possibly saving their child tens of thousands of dollars in Lender’s Mortgage Insurance premium.
