May 18, 2018
First home buyers are delaying or missing the opportunity to get into the property market by not engaging a guarantor on their home loan, new data shows.
According to Mortgage Choice and CoreData’s Evolving Great Australian Dream 2018 whitepaper, just 4.9% of all first home buyers said they used a guarantor to purchase their property.
However, bucking the trend are home buyers aged 29 years and below, of which 21.8% had someone go guarantor on their mortgage.
“The data raises the question that many are divided on: Are first home buyers missing an opportunity to get into the property market by not engaging a guarantor?” Mortgage Choice Chief Executive Officer Susan Mitchell said.
Currently, the average first-time buyer needs to put down approximately $100,000 in deposit to secure a property with the median dwelling value of $554,605.
“For many first-time buyers, the biggest hurdle they face is saving a sufficient deposit that amounts to 20% of the purchase price, and this has been made even harder by strong property price growth over recent years,” Ms Mitchell said.
The whitepaper found that 40% of buyers would need some form of assistance to enter the property market, as they had just 15% or less of the required deposit for a property.
“The Government’s new plan to allow older Australians to stay in their homes for longer, as part of the ‘More Choice Longer Life Plan’ is likely to hinder the supply of available properties to those looking to buy their first home," Ms Mitchell said.
A variety of factors is making it increasingly difficult for people to achieve the traditional Australian dream, say 86.4% of people asked by Mortgage Choice.
“One way first home buyers can get a leg up onto the property ladder is to access intergenerational wealth, created by the boom in the property market, and ask a parent to be a guarantor by offering their own home as extra security,” Ms Mitchell said.
“This strategy lets them get onto the property ladder sooner rather than later, and with a smaller deposit and has the added advantage of avoiding Lenders’ Mortgage Insurance, which can total thousands of dollars for cash-strapped first home buyers.”
The whitepaper research revealed that on a whole, 15.2% of prospective home buyers across Australia would have someone go guarantor on their loan. This figure dropped to 12.6% for females.
On a state by state comparison, Western Australia had the highest proportion of prospective buyers saying that they would have a guarantor on their mortgage, at 16.5%. They were followed by New South Wales at 13.9% and Victoria at 13.3%.
Of those who purchased with a guarantor, 77.2% said their parents were their guarantor.
Ms Mitchell said it was important for buyers and their prospective guarantor to weigh up the pros and cons before making a decision.
“Having a family member go guarantor on a mortgage is not without risk and as such, no one should jump into the situation until they’ve given it considerable thought,” she said.
“If the first home buyer defaults on their home loan, the guarantor becomes responsible for paying their debt. This can be a significant financial impost for the guarantor as it can affect their ability to cope with their own day to day costs, which in turns compromises their financial wellbeing.
“Their own ability to borrow money will also be reduced after they agree to become a guarantor.
“As a result, it is very important for both the buyer and the guarantor to set clear expectations from the outset and think carefully about their future plans.
“If a buyer has a guarantor on a home loan, it is essential they speak with a qualified mortgage broker and a solicitor to protect both parties. A contract can be drawn up that clearly explains how the loan will be structured and what happens in the event that the borrower defaults on their loan.
“It is helpful to note that a guarantor is not tied to the loan for its entire duration. Once a buyer has built up sufficient equity in their property, a guarantor can apply to be released from the loan, though this may incur a fee.
“Lastly, buyers should always look at their other options as a guarantor is not the only way that someone can purchase a property. A buyer can receive a one-off financial gift to help cover part or all of the cost of the deposit, which reduces the risk to a potential guarantor,” concluded Ms Mitchell.
Tips for guarantors and prospective buyers:
- Guarantors and prospective buyers should have deep discussions and plan for the worst case scenario and a ‘plan B’ such as renting out the property, should unexpected circumstances, such as illness or loss of job, occur that can affect the borrower’s ability to make loan repayments.
- Guarantors should also review if they have sufficient funds to afford repayments for a third party’s home loan should that become necessary.
Children asking parents to go guarantor should be ready for them to decline with just 21.6% of Australians willing to be a guarantor.
- Finally, if you do decide to go down the guarantor path to help a family member into their home sooner, get a lawyer to draw up a legal document that outlines what happens in a variety of circumstances so everyone is well aware of the potential consequences and goes into any agreements with knowing all possible outcomes.