June 23, 2017
When buying your first home, generally you need to have a deposit. This deposit will usually be a percentage of the total purchase price for the property you are buying. Whilst previously, home buyers needed to cough up the full 20% deposit, banks will generally accept the following:
- 5% deposit - This must be saved over a minimum of three months. That means, a lender will want to look at your savings and see that you have been building and contributing towards your deposit for a decent period of time. They like to see evidence of genuine savings. Due to the lower deposit amount, mortgage insurance will be required here.
- 10% deposit- This can be either saved or gifted (usually by a parent). Mortgage insurance will still be required here.
- 20% deposit- This can also be gifted funds or genuine savings, but you will avoid mortgage insurance altogether in this instance.
There are of course other costs involved in buying a home:
- stamp duty (which may be waived by some state governments for certain borrowers, like first home buyers or people buying new land.
- Other minor government legal costs which vary from state to state.
- Conveyancing costs
Let’s assume that you can cover these “other” costs but don’t have the required deposit, and that your parents are happy to help (but are unable to raise a large sum of money to provide, a gift)
Your parents may be able to help by offering one of their properties as additional security. Their incomes are not assessed or needed. This application still has to stand on its own feet, based on your incomes alone. This is called a SECURITY GUARANTEE.
It is structured as two loans
- The major loan (your loan) is for 80% - and will be secured by the new home you are buying. This loan will be in your name (as the purchaser) alone.
- There is a secondary loan for 20% . This loan is secured by both the purchase property and the parents property being offered. The purchaser (you) is the borrower, and the parents sign only as guarantors.
It is a limited guarantee, as your parents only guarantee the smaller loan – and it is only guaranteed in the worst-case scenario that a purchaser fails to meet their obligations to repay both loans.
The guarantee lasts until the smaller loan is paid off in full (at which point the guarantee and the parents’ property is released). This might come from literally paying off the loan, or it might also come (in time) by revaluing the purchase property and shifting the smaller loan over to the purchase at a “higher” 80%.
Property values can rise, but equally they can plateau or fall – so it is best to plan on the assumption that you will “pay off” the 20% loan. Sometimes, to put some structure in that, we might put the 80% loan over 30 years, and the 20% loan over (say) 10 years, but this is all dependent on individual circumstances.
It is important to note however, that security guarantees are not offered by all lenders, and it is not a black and white “fits all” policy. It is case by case and is intended for a situation where parents can clearly afford the “worst case” scenario where they become responsible for the guarantee.
Banks will usually require parents (guarantors) to seek and obtain independent legal advice around the worst case scenarios. For this reason - banks would generally prefer that the security guarantee property is an investment property or a holiday home. They would generally prefer it is not the family home (and will assess the application differently if it is).
Parents will need to live their own financial lives in the coming years which might involve shifting home or selling down assets. If this involves the security guarantee property – you can see why it is important to consider these options before entering such an arrangement.
A security guarantee might be an interesting option for a family to consider.
It won’t fit all – but it definitely suit some.