How a guarantor loan can get you into the property market!
Parents are lending money to their children via the "Bank of Mum and Dad" at an accelerating rate in response to tightening lending standards and tougher repayment terms, says a recent article published by the Australian Financial Review. This offers some insights into how first home buyers are navigating the lending landscape in the light of the Banking Royal Commission.
A staggering figure is that more than 55 per cent of first time home buyers have required financial assistance from their parents, with the average cash contribution being around $89,000. In fact, Digital Finance Analytics, goes as far to suggest that the Bank of Mum and Dad is now a “Top 10” lender.
So with housing affordability a massive issue for many young Australians, trying to get a toe hold in the property market, how does the bank of Mum and Dad work? It takes the form of a family guarantee loan, which is when the equity in your parent's home is used as security on your loan.
Also known as a family pledge or guarantor home loan, it is a type of mortgage that allows you to borrow more money and provide less of a deposit. It allows you to provide your deposit (or no deposit), and your guarantor puts forward an agreed portion of their property as security, allowing you to go into the loan with a larger deposit, and if your deposit is 20% or above, avoid Lender's Mortgage Insurance (LMI).
Usually when a loan is more than 80% of the purchase price (80% LVR) you will have to pay lenders mortgage insurance, but a family guarantee means you won’t have this extra expense.
It’s even possible to avoid paying any deposit because the equity in your family’s home can act as a deposit. This ‘guarantee’ makes it possible for you to borrow the full 100% cost of the home, plus stamp duty and legal fees. Lenders mortgage insurance will still be payable if you borrow over 80% of a property’s value.
There are many issues to consider when taking out family guarantees and it pays to keep in mind that loan terms and conditions can vary between lenders. Not all lenders even offer these type of loans, so give us a call and we can advise you which lenders would best suit your situation.
Here are some of the common questions we get asked about guarantor loans. For more detailed information about any of the following, don’t hesitate to get in contact.
Does the entire loan have to be guaranteed?
No, the loan can be split, enabling the equity in your family’s property to be used as security for a small portion of the loan, for example 20%. The lender will take a mortgage out over the guarantor’s property to this specified amount.
Who can act as guarantors?
Guarantors are usually parents, but some lenders under certain conditions will accept grandparents, siblings, a de facto partner or a former spouse. To be approved by a lender they must provide enough equity to cover the amount being guaranteed and show proof of income. Normal lending criteria will apply in all circumstances.
What are the risks for the guarantor?
There are risks involved, which is why it is important for the guarantor to know what they are getting into. Some lenders even require that legal advice is sought to ensure the guarantor understands that if there is a default on repayments, they will be the ones held liable.
How long does the guarantee have to be in place?
If the loan is structured correctly, the guarantee doesn’t need to be in place for the entire duration of the loan. Once you have repaid the portion of the loan that is guaranteed or your property has increased in value, the guarantor can be released.
For more information on Guarantor Loans or any other aspect about buying your first home, contact one of our mortgage specialists.