September 06, 2017
How to buy a residential property with minimal deposit
Family guarantor loans have become a regular offering by many of the lenders in Australia.
Mortgage Choice data has revealed that the percentage of first home buyers gaining assistance from family members through providing a guarantee has tripled over the past 2 years.
Property prices have been steadily growing in Australia and the Australian Bureau of Statistics shows that the dollar amount of the average home loan has grown 4 times faster than the average full time wage. The effect has been particularly hard on first home buyers with bigger deposits needed and larger loans required to buy their first home.
Loans supported by a guarantee given by a family member is a way around this issue.
First of all, what is a guarantor?
A guarantor is a third party to a loan where they pledge additional security support. Guarantors are usually immediate family members such as siblings, parents or grandparents.
The lender will take a mortgage over 2 properties to support the loan required to secure the first home as follows:
Young adult buying their first home for $400,000 but only has sufficient savings to cover all up front costs. Income is strong and can easily meet servicing requirements for a loan of $400,000 over 30 years.
Mum and Dad have a holiday home or investment property worth $500,000 with no debt attached to it.
Loan 1 is to the young adult for $320,000 secured by the first home.
Loan 2 is to the young adult for $80,000 secured by the holiday home. Mum and Dad provide a guarantee of $80,000 and allow a mortgage to be taken on the holiday home.
Some lenders structure the loans differently and will require both loans to be secured over both properties and Mum and Dad to provide a guarantee of the full $400,000.
Some lenders will allow existing mortgages to be in place on the second property being taken as long as they remain within security guidelines.
Some lenders will allow Mum and Dad’s family home to be taken as security to support the new loan(s) being taken.
As you will note there are many different approaches to achieve the same outcome.
The responsibilities of being a guarantor
Should the borrower (in our example the young adult) stop making the home loan payments then the lender can turn to the guarantor and ask they bring the loan up to date and to keep making the loan payments. Should the guarantor not be in a position to make those payments the lender may take action under the mortgage and look to sell the 2 properties supporting the loans. This is where it is best to keep the dollar amount the guarantor is exposed to as low as possible (ie not guarantee the whole purchase price but just the 20% component).
The benefits of having a guarantor
By providing a guarantee the first home buyer avoids the need to put up a minimum of 5% genuine savings plus meeting the up front costs.
The first home buyer can also avoid the need for Lenders Mortgage Insurance (LMI) by covering the 20% deposit. LMI is most often a condition of the loan where the borrower puts in less than a clear 20% deposit. The insurance is there to protect the lender but the premium is paid as a one off up front fee by the borrower.
When a family member pledges property to cover that 20% deposit then you can avoid the need to pay the LMI.
As you will note, family guarantee loans can be very valuable and assist first home buyers into their own home sooner by saving the need to save for the deposit.
To find out more about how family guarantee loans work and the different lender requirements contact Graham Evans on 0481 833 109.