Borrowers turn to bank of mum and dad in HomeBuilder confusion

Consisting of a $25,000 grant for owner-occupiers “substantially renovating” or building a new home this year, the grants are means tested, with the government setting income caps of $125,000 for singles and $200,000 for couples. 

While the grants have been popular with borrowers, its progress has been stymied by a lack of lenders accepting the grant as funds to complete, according to the broking industry

The issue largely comes down to the fact that lenders have not been made appointed agents for the grant, unlike with the First Home Owners Grant (FHOG), where they can manage the funds. 

As such, many borrowers – particularly first home buyers (FHBs) looking to use the grant to enter the property market and build their own home – have been relying on borrowed/gifted funds to make up the shortfall.

The broker experience

Speaking to The Adviser, Karen Le Comte, a Smartline broker in Cleveland, Queensland, elaborated that take-up of the HomeBuilder scheme has been strong in Queensland, but it relied on FHBs with low to middle incomes (those covered by the means-tested grant) being able to borrow funds in the first place.

She said: “The first thing that we’re trying to do is explain to the clients that they need to replace [the grant amount] with different funds upfront so that we can include it in the funds to complete. Then they can repay them once the grant has been received. 

“That has been working well as a workaround, with a high percentage of our clients relying on the bank of mum and dad. 

“The banks know that this is happening and we are disclosing it in the paperwork, with a letter from the parents outlining that it is a gift (or, in some cases, a non-refundable gift).”

However, Ms Le Comte added that if borrowers don’t have a family member or friends to borrow the money from to “make the transaction work”, they are generally limited to taking out loans with a higher loan-to-value ratio, which adds on mortgage insurance costs and generally come with a higher interest rate.

She told The Adviser: “While the grant was not aimed at helping FHBs gain access to the market, that represent the majority of the market taking advantage of the HomeBuilder in Queensland. Here, we’ve got the $15,000 FHOG and the $25,000 HomeBuilder. So, if you’re looking at a purchase of house and land of around $500,000, you only really need a deposit of $20,000 of your own money.

“But if they only have $20,000 and the FHOG [and not HomeBuilder upfront], that is where it is getting harder for first home buyers looking for a mortgage. The only lender that will look at those sort of scenarios are the banks that go up to 98 per cent loan-to-value ratios. But then the borrower is facing a much higher interest rate – up around 5 per cent – but it might be the only loan available to them if they want to get into the market now.

“That is a real disadvantage in the long term because they’re going to be at a high loan-to-value ratio for several years before they can take on mainstream products,” she said.

Indeed, Heritage Bank recently told brokers that it was “happy to accept construction loans in which the borrowers intend to apply for the HomeBuilder grant”, but “given the timing and the process of the grant application and disbursement, [Heritage] cannot factor it in the loan application in terms of being available for funds to complete, as we can with FHOG”.

As such, the lender outlined to brokers that the borrower would either need to fund the equivalent contribution themselves, or be in a position to borrow the equivalent. 

Heritage also revealed that it was monitoring the various state government sites for any updates to their process that may change its approach, adding that it was “working with a number of industry bodies to lobby the federal and state governments for changes to the scheme in order for us to be able to use this grant as funds to complete”.

Suggested solutions

Ms Le Comte suggested: “It would be great if the Treasury department could issue an eligibility letter upfront that could be submitted with the application and accepted by the lenders. Or better still, allow the banks to be the agent (as they do for the FHOG) and this would resolve all issues.”

Fellow Queensland broker Wayne Spindler from Fox Home Loans agreed, telling The Adviser: “In my opinion, it has not been applied in the best interest of the intended recipients. It is not working in the manner that we hoped it would and should and, because of when and how it is paid... 

“The main hurdle is that the funds are paid to the client and not until after construction begins for house and land applications and at completion for off-the-plan purchases. 

“This totally defeats the purpose and expectations we all had – from lenders to brokers and clients alike – that it would be treated and processed like the FHOG, but it is not.

“The solution is very simple: Allow for the grant to be approved subject to the provision of the requisite contract and finance approval and then allow lenders to administer the application, like they do for the FHOG,” Mr Spindler said.

Victoria-based broker Rod Donnelly, from Focus Loan Choices, also lamented that the HomeBuilder Grant “has promised so much and delivered so little”.

“It’s had a lot of enquiry from first home buyers seeking to buy land and build utilising the grant, and completing to secure titled land, which is in short supply. 

“In advocating for my clients, I feel their frustration [as the grant is not being accepted by lenders as funds to complete]. They are required to apply for a loan of $25,000 more than they require and pay the extra mortgage insurance,” he said.

“The solution seems so simple. If state revenue offices used the same mechanisms that already exist for other grants (i.e. FHOG) then lenders could control the funds, thus enabling the grant to be included in the funds to complete – simple.”

[Related: Calls mount for HomeBuilder reform]