A cooler property market has been great news for first home buyers. But scraping together a deposit can still be tough. That’s when some home help can come in handy.
There are plenty of ways parents can get involved.
Allowing adult children to save on rent by moving back home is one option, though it won’t work for everyone.
A cash gift can help boost a first home buying deposit, but lenders still like to see a history of regular savings. So it’s not a failsafe solution. Besides, not every parent has a lazy few thousand dollars to hand over.
Family pledge (guarantor) loans can be the solution
There is another way that parents can help out first home buyers. That’s by agreeing to act as guarantor for all or part of your adult child’s home loan.
To raise your hand as a guarantor you will need to be a homeowner. No cash changes hands, rather you offer up part of your home equity as security for the first home buyer’s loan.
This arrangement is commonly known as a ‘family guarantee’ loan or a ‘family pledge’ loan. Most lenders have a variation of this type of loan, so it’s important to speak with your Mortgage Choice broker to know which lender and loan is right for you.
Reaching the 20% benchmark
In many cases the guarantor can select the level of security they wish to provide. If the first home buyer has a deposit of 15%, parents may choose to guarantee just 5% to take their child up to a 20% deposit.
This 20% benchmark matters. With anything less than a 20% deposit, lenders will ask home buyers to pay Lender’s Mortgage Insurance (LMI). It’s a cost than can run into thousands of dollars, and as LMI protects the lender, not the borrower, it’s worth avoiding or minimising LMI where possible. Having a guarantor helps a home buyer with a small deposit do just that.
A guarantor’s role doesn’t last indefinitely. Once the first homeowner has built up sufficient home equity, the guarantor’s responsibility can end.
