March 02, 2015
Younger home buyers, particularly those buying for the first time, are finding it increasingly difficult to get into the property market. Low interest rates are keeping affordability within reach of many however the savings requirement has never been more challenging. The removal or restriction of various government grants has increased this challenge. Home buyers unable to make a substantial contribution towards their purchase are likely to incur a substantial premium for lender’s mortgage insurance and are increasingly also being hit with a higher interest rate.
Many parents wonder how they can assist. Here are a few options:
1. A gift. Of course this is not always possible and must be non-repayable, leaving some parents concerned the money is at risk in the event of a subsequent marital dispute or deceased estate.
2. A range of lenders allow parents to offer their own home, investment property or a term-deposit to the lender as additional security. Parents must provide a guarantee, meaning they are essentially taking on the risk that would otherwise have been covered by mortgage insurance. See more detail below.
3. In an innovative solution, parents can assist their children with any amount up to the full purchase price and have their contribution secured by way of a registered mortgage. This can be viewed as an investment, with parents setting the interest rate. Arrangements for repayments will be formalised and managed on behalf of the parents, including enforcement if required, yet parents can also subsequently waive/forgive their investment.
Three important benefits of using a guarantee
- Avoiding a premium for Lenders Mortgage Insurance (LMI). Depending on the situation this can save up to $20,000.
- Getting a better loan interest rate. Most lenders offer a lower interest rate when there is no LMI.
- It could be a 'game changer' when calculating the maximum purchase price. This is most obvious when your savings are low but your income in strong.
Considerations that parents and borrowers should discuss:
- The guarantor puts a property at risk by allowing a mortgage to be taken on it.
- The guarantor has to provide a lot of personal information for the application, as much as you do.
- If a lender already has a mortgage on the property you may need to use the same lender. If the lender doesn't accept family guarantees we may need to structure your finance differently.
- There are usually additional loan fees of $200-$400 because loan contracts are more complicated.
- The lender will keep a mortgage on both properties as long as you have your loan. There are also implications to consider if the guarantee property needs to be sold.
Why you need to call us
We take the time to understand your individual requirements and will arrange the right option for you, so you too can know the feeling of owning your home!