Although the property market appears to be cooling off somewhat, housing affordability is still a challenge for first home buyers, particularly with the number of interest rate rises in recent months (although at its June 1 meeting, the RBA kept rates on hold).
Banks also still have a tight rein on lending criteria, so you'll be needing a fairly sizeable deposit of at least 10% to get your foot into your own front door. Bet you're tired of hearing all that, aren't you?
What are your options?
Now might be the time to consider buying with a friend or family member and there are a couple of different ways you can do this:
- The family equity home loan
- Tenants in common
A family equity home loan allows your parents or grandparents (or aunties, uncles, etc) to provide a guarantee in support of your home loan application by using equity they have in their own property as security. Hence, they become the mortgage's guarantor by using their property to support a guarantee.
The guarantor can guarantee all or just a part of the home loan. From both parties' point of view, the smaller the guarantee the better, as the lender will come after the guarantor for money if the borrower (that's you) defaults. You should set up a budget to manage your expenses and repayments, and stick to it, so that your guarantor can be confident they're not risking their money.
You should also make repayments at a higher level than necessary so that you build up equity in your property sooner, so you can release your guarantor.
Get your head around LMI and LVR
Having a guarantor means that you can borrow more money than the bank would lend you in your current circumstances, or that you can avoid paying Lender's Mortgage Insurance (LMI). LMI kicks in when you borrow 80% or more of the property's value. LMI protects the lender against making a loss if you default on your home loan and they have to repossess the property, and end up selling it for considerably less than they loaned against it in the first place.
For example, say you want to purchase a $300K property and borrow $285K. That gives you a Loan to Value Ratio (LVR) of 95%, which will mean you have to pay an LMI premium. With a guarantee of $60K from your parents as additional security, the LVR would reduce to 79%. So, you won't need to pay LMI (saving you a few thousand dollars) and the banks may be more likely to loan you the money because your LVR is lower.
In Part 2, we tell you about buying as tenants in common.