Family guarantee – a low deposit option

The biggest hurdle prospective home buyers are facing is getting a large enough deposit in order for the banks to help them. Most people find it extremely hard to save a big enough deposit in a short period of time, due to expenses such as rent, bills and petrol etc. This is where the guarantor option becomes a viable play for some buyers and first home buyers are taking advantage of this the most. 

A first home buyer of 2015 has changed significantly from previous generations. There are now many options available to get a head start and get their feet on the property ladder.  Of course it is always preferable to have saved at least some deposit. Not only do lenders look for a history of savings but it is also a signal to parents that the kids will actually pay back the loan.

Guarantor explained

Most parents would do anything they can to assist their kids to enter the property market.  Going guarantor generally means using equity in your own residence or investment property as security for your child’s home loan. If they don’t have at least 20% deposit, it can help to secure finance for a property without having to pay lender’s mortgage insurance (LMI) What is Lenders Mortgage Insurance? Paying LMI can easily add more than $10,000 to the home loan.

Guarantee options

There are two main types of guarantees:

  1. A supported guarantee (security guarantee), where the guarantors home or investment property is provided as security for the borrowers home loan. This is the most common guarantee, or
  2. An unsupported guarantee, if the borrower can’t meet their repayments, the guarantor services the loan. (Unsupported  guarantees are not that easy to get approval from the lenders.

 

A popular strategy for guarantors and the banks, is to limit their liability to a dollar level. They can limit their guarantee to 20% of the purchase price so their children can escape paying the lender’s mortgage insurance premium. Most lenders will allow you to split the loan into 2, allowing you to easily identify the portion that relates to your parents guarantee. You can then concentrate on paying down the guarantee loan quickly and having the bank release the guarantors and the guarantee security sooner rather than later.

Gifting cash can be another option. Parents may choose to gift an amount to their child to assist with the deposit or fees, rather than tie up a property in a security guarantee. This is usually referred to as a non-repayable gift.

Risks

Whilst this family support has assisted many children, there can also be some risks for those well-meaning parents. For instance, if the client fails to make repayments the lender generally sells their property first and if there is a shortfall the lender will go to the guarantor and could sell their home.

It’s always sensible to obtain independent legal advice prior to guaranteeing any home loan, this is mandatory and a part of the process for some lenders. As an added precaution, we suggest the kids take out life and income protection insurance to protect their ability to continue making loan repayments if they are unable to work.

If you would like to discuss the best way to help your child get into the property market or speak to an independent financial advisor, please give Steve Sims a call on 0433 124 081 or email at steve.sims@mortgagechoice.com.au.

Posted in: Home loans

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