First home buyers have been the only group across the housing market where we have seen growing demand over the past 12 months. In many markets, entry-level prices are starting to look more appealing and more attainable, buyer competition is down and prices are tipped to stabilise sometime this year. But this doesn’t change the fact that many first home buyers are still having trouble finding enough cash for their deposit, let alone enough to avoid paying Lenders Mortgage Insurance (LMI) as well. So, if you get on well with your parents (or siblings), here’s an option to consider.
A family member (usually a parent or sibling) uses the equity in their own property to provide security for the extra money you need to borrow. It is usually a separate loan in their name just for the extra amount you can’t borrow on your own.
How does it work?
Let’s say you wanted to buy a property with a total cost of $500,000 (including purchase costs). You have saved 5% ($25,000). To avoid paying LMI, you would need a deposit of $100,000 (20%). If your parents have enough equity in their property, they could provide a guarantee of $75,000, effectively giving you an 80% Loan-to-Value ratio and ensuring you wouldn’t have to pay LMI. Alternatively, you may not have any savings at all. Your parents could guarantee the full $100,000, so you can get into the property market now.
Important things to know
– You need to be able to service the full amount of the repayments on your own.
– If you default on your repayments, the bank will look to your guarantor to pay what is owed. Guarantors usually need to have the capacity to make repayments if necessary, or repay the guarantee amount by the sale of their asset as a last resort.
– The guarantor will be released from their guarantee once the lender is confident you can continue to pay off the loan reliably. This may be when you have paid off the portion of the loan under guarantee, or when there is sufficient equity in your property for you to take on the loan yourself (if the property appreciates in value), assuming there are no other concerns.
– You will typically need to use the same lender as your guarantor.
– Mixing family and money has the potential to be problematic. Both parties must trust each other completely and guarantors must fully understand their commitment.
– It pays to get professional help if you think you would like to go down this path. Not all banks allow family guarantees, and not every situation suits a family guarantee. Family guarantee policies are also very different from one lender to another.
Please get in touch if you would like to explore this option.