September 16, 2016
A recent survey carried out by Mortgage Choice to First Home Buyers reveal that parents going guarantor on their children's home loan has risen significantly in recent years. The survey shows that 4.9% of all first home buyers had a parent or immediate family member as a guarantor on their home loan. This figure shows an increase from 3.9% in 2015 and 3.8% in 2014.
Considering that property prices have risen substantially accross mmost property markets, this jump is not surprising.
Data from CoreLogic shows property prices rose 8.3% accross the combined capitalk cities, with Sydney and Melbourne standing out in their performance
Given the consistent price rise month after month many first home buyers are finding it difficult to put a foot on the property ladder without some form of financial support. Having a family member go guarantor on a home loan means first home buyers are not only able to to get a foot on the property ladder earlier but they can also potentially avoid paying Lenders Mortgage Insurance.
Many lenders allow a family member to go guarantor on a home loan, they use the equity in the guarantor's property as additional security for the borrower's loan. The primary security of the borrower's home loan is still the property, however the lender also takes a mortgage over the guarantor's property to support the guarantor's financial guarantee.
As property prices continue to rise at a higher rate than wage growth, it is becoing harder for first home buyers to save the deposit they need in order to purchase a property,
By having a guarantor, first home buyers can (in most instances) borrow the full purchase price and sometimes even the costs associated with purchasing property. The amount of the guarantee depends on the individual lender's policies. The guarantee can vary from the full loan amount to as little as 20% of the loan (where the loan is for 100% of the purchase price).
Once a first home buyer builds up equity in their property, their guarantor can ask to be released from the loan.
Provided the first home buyer can comfortably make their regular mortgage repayments, there is very little risk associated with this type of financial assistance and as such, we would expect to see continued growth in the percentage of first home buyers using guarantors.
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