Home ownership is a dream shared by many young Australians – and one of the main challenges for first homebuyers has always been saving a deposit. Today this is tougher than ever – with rising average house prices ($896,000 in June 23) [i], increased renting costs and the skyrocketing cost of living to contend with.
As many as two-thirds of young people are giving up on home ownership altogether and the numbers of Aussie homeowners are trending downwards.[ii]
Enter ‘The Bank of Mum and Dad’ – for the majority of young Australians, family support is the biggest factor helping them get on the housing ladder. Over 60% of first homebuyers receive some form of financial assistance from their parents to buy their first home.[iii]
How can we help?
We often find parents are keen to help their children to take that first step, however providing a gift or loan may not be an option. Equally, we find the kids may be reluctant to take money from family preferring to ‘go it alone’ however they don’t have the deposit funds needed to afford to buy.
A solution for both parties could be a family guarantee loan structure, also known as a pledge/security guarantor. Although the concept may be familiar, its meaning and implications are often misunderstood. Let’s unpack it here with some common questions.
Who can be a guarantor?
A parent or close family member (in some cases) who owns property with equity can generally qualify as a guarantor. The amount which can be guaranteed will be determined by the equity available. In some instances, a guarantor can also use a term deposit instead of property.
How does this work?
This concept works by a guarantor being able to mitigate the amount of deposit needed by providing a property as security to support the borrower’s loan as illustrated below:
The family provides property as security for the new loan, without providing a servicing guarantee – this means that the overall repayment commitments must be able to be serviced based on the borrower’s eligible income (there is no reliance on the guarantor’s income for servicing of the loan.)
How is the loan structured?
The maximum we can borrow against a property without LMI (Lender’s Mortgage Insurance) is generally 80% LVR (loan-to-value ratio), so the loan can be structured to this maximum against the property being purchased and then the difference borrowed against the guarantor’s property. This allows repayments to be accelerated on the smaller loan to pay down the guarantor loan as quickly as possible. In this example, the loan could be set up in two loan accounts:
- Loan 1– secured only by purchasing property to 80% of its value – $680,000
- Loan 2 – secured by both properties as the remainder (this would be the smaller amount – 20% of purchase price plus costs) – $210,000
What are the benefits?
- Avoids LMI
- Allows homebuyers to get into the market faster, with minimal deposit
- The homebuyers are still responsible for the repayments and the bank assesses on this ability
- Can mean lower interest rates
- Parents bear no cost when going as a guarantor
What happens if the borrower defaults?
While guarantors are not liable for the repayments, should the loan fall into default then they can be called upon to meet the obligations and worst case pay out the debt.
Is this just for first homebuyers?
No, with some lenders it can be used to purchase any home or even an investment property. This depends upon the lender’s policy.
Does the new loan need to be with my current bank?
Not in all cases. Many lenders will be willing to take a ‘second mortgage’ on a property mortgaged by another lender. We would always check the policies with both lenders.
When can the guarantee be released?
When the LVR has reduced to 80% (usually through a combination of an increase in property value and the borrower making escalated repayments), the guarantor’s property can simply be released.
What happens if I need to sell?
In some instances where the security property needs to be released earlier then the borrower can refinance and pay LMI if needed.
For many young people family support is pivotal to help them get on to the property ladder. A family guarantee structure, or pledge/security guarantor, offers a solution allowing families to overcome financial limitations and help aspiring young homebuyers. To find out more, contact Treysta Wealth who can connect you with an Indigo Finance Lending Expert.
article by Melanie Cunliffe, Indigo Finance