Home loan for Granddaughter

Question

Can I use collateral of my $325000 home which I own in Australia to help my granddaughter buy a house in her name.
Can the repayment be structured as Interest Only for initial few years. She is studying law at university and may not be able to pay full Equated Monthly Installment.

Answer 1

You can use the equity in your home to help your granddaughter buy a house.

Basically if you don't want to pay LMI (Lender's Mortgage Insurance) you should stick to a LVR (Loan to Value Ratio) of 80% or less.

This means that if your home is worth $325,000 you could borrow up to $260,000 on your property to stay within this 80% LVR. However, say you still have an outstanding mortgage of $100,000 you could only borrow a further $160,000 to stay within this 80% LVR.

This amount could be used as a deposit for your granddaughter's house with another 80% mortgage also on her new house.

You can also get an interest only loan with most banks and other lenders. When we got ours with ANZ we got up to 10 years interest only, and NAB I think offers up to 5 year interest only. So you need to check with your lender how many years interest only they offer. I have noticed lately that some lenders have raised their interest rates for interest only loans, so you should check this with your lender as well.

If your granddaughter is going to have trouble making repayments whilst she is studying you might need to co-sign the mortgage with her, as the banks will also assess the loan based on there being enough net income to afford the repayments. You can co-sign the loan with her and she can be the sole name on the property deeds, or you can co-sign the property deeds as well.

If you want her to pay you back once she starts working, then that is another issue in which you should probably set up an agreement between the two of you.

Just a word of warning: Make sure you add at least 2% to whatever interest rates you are offered, and can still make repayments at this higher interest rate, as the next move in interest rates is going to be up. The question is not if they are going to go up but when are they going to go up? In answering that I would say possibly some time later this year and pretty much definitely by early next year.

Answer 2

Be aware that if you're planning on acquiring an interest-only loan there's a decent chance that at the end of the loan period you'll have to go through the loan application process all over again (with associated fees and charges).

Recent APRA moves to de-risk the bank's loan books has forced the banks to cut back on their interest-only lending, which has pushed interest-only rates up; you might not be getting much lower repayments with interest-only.

Loans to foreign purchasers are also being curtailed at the moment, which may impact your ability to either co-sign or act as guarantor.

I can't imagine that banks would be overjoyed with the idea of loaning to a student/near-retiree pairing, with no (I assume) income for one and imminent retirement for the other. You will need to talk to your lender to find out what their requirements would be regarding income.

One thing you could consider over your property is a reverse-mortgage, a product designed to allow retirees to access funds in their home. Reverse mortgages are typically limited to 30% of property value in their initial draw-down.