Potential home buyers borrow more, get help from parents to keep up with rising house prices

Hopeful homebuyers are pulling out all the stops to increase their budget as housing prices soar by taking on more debt or asking family for help.

Mortgage brokers are fielding enquiries from buyers who have already gained pre-approval but soon realise their limit is not enough to keep up with price rises – and need more cash fast.

Some potential buyers, who thought they had a 20 per cent deposit saved, are choosing to borrow a higher amount even if it means paying lenders’ mortgage insurance.

Others are getting help from the “Bank of Mum and Dad” in the form of cash gifts or guarantor loans made easier by the rise in the value of their parents’ own home amid the booming market.

It comes as housing prices soar across the country, with property values growing at their fastest rate in 17 years over February on CoreLogic data. Prices are at record highs in every city except Darwin and Perth, Domain figures show, while home lending hit record numbers for the second month in a row, the Australian Bureau of Statistics (ABS) reported this week.

The price jump is fuelled by an improving economic outlook after the COVID-19 crisis, combined with ultra-low interest rates and government stimulus measures – and the market could rise more if responsible lending laws are relaxed.

The Reserve Bank noted house prices had increased in its monthly statement on Tuesday but again emphasised plans to keep the cash rate on hold for three years, noting that lending standards remain sound “and it is important that they remain so”.

Over the past two months, prospective buyers have been asking mortgage broker Chris Foster-Ramsay if they can increase their budget by $50,000 to $100,000 after realising the market has jumped.

“They’re coming back to me and saying, ‘The market’s going absolutely bananas, we need more money,’” the Foster Ramsay finance director said.

“[Clients ask,] ‘How much more money can we get? Can you do a recalculation?’”

For those with the extra buying capacity, some are choosing to pay lenders’ mortgage insurance, which allows a purchase with a deposit below 20 per cent.

He has also seen an increase in non-refundable cash gifts from parents to help their offspring into the market.

Rapid price growth has been a source of frustration for those trying to buy, said Sydney-based mortgage broker Rob Lees of Mortgage Choice Blaxland, Penrith and Glenmore Park.

“People have had pre-approvals and are now finding that is no longer adequate for the sort of money they’re going to have to spend,” he said.

“Most people are finding it very frustrating because prices are going up, so they’ve had to increase the borrowing they’re going to take on.”

Some borrowers had hoped to hold on to part of their savings but have realised they need to contribute more towards their deposit, while others are opting to pay mortgage insurance or ask parents for help.

Shore Financial chief executive Theo Chambers said properties were selling above their guides at all price points, leaving potential buyers to fall in love with a property, then realise at auction they cannot afford it.

“The Bank of Mum and Dad is helping a lot of people at the moment,” Mr Chambers said.

“Some parents aren’t that liquid in terms of assets … a lot of their wealth is tied up in property, so they provide support in terms of a guarantor loan.

“Some others do have liquid funds, and the ones that do would prefer to give their children the additional cash they need to make the 20 per cent deposit.”

After Melbourne’s extended lockdown, Victorian first-home buyers lucky enough to keep their jobs have been able to use extra savings to increase their borrowing capacity, 40Forty Finance director Will Unkles said.

For a couple who could not travel overseas or socialise and managed to save as much as $20,000, a previous pre-approval for a $600,000 property could be increased to a budget of $700,000, he said.

The trade-off might be giving up an extra bedroom or a preferred location for those who cannot borrow more. But he has seen clients considering mortgage insurance and said parents have been “extremely” active in helping offspring buy.

“They’re definitely more willing to help; conversations around guarantor loans have increased,” he said.

“Parents are seeing there’s a bit of that FOMO [fear of missing out]. They want their kids to get in sooner rather than later.”