Keeping it in the family

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.

Holding onto spare cash

Your Mortgage Choice broker can explain the different features of the various family pledge loans available. Some allow first home buyers to borrow up to 100% of the property price, others a bit more.

The common thread is that this style of loan helps first home buyers avoid LMI, and instead use their savings for moving costs, completing a few renovations  or just as an emergency fund.

Most importantly, it’s a way for first time home buyers to enter the property market years sooner than would otherwise be possible.

Keeping things in the family this way doesn’t mean first home buyers can bypass the need for savings. Lenders still like to see a healthy track record of saving, as well checking that a first home buyer meets their income criteria. But a guarantee can certainly be a valuable helping hand.

To learn more about owning your first home head over to our First Home Buyer Information Centre. We have extensive guides on the ownership process, acquiring government grants and more.