07 Sep Could a family guarantee help get you into the market sooner?
With housing affordability stretched for many younger Australians, the good news is that there are still ways to get into a home of your own.
One of the biggest obstacles for new buyers is more often than not, coming up with the deposit for a home. Typically, lenders require you to put down a 20 per cent deposit, which can be a substantial sum of money when real estate prices are as high as they are in Melbourne. This is even more difficult when property prices keep rising, making many first-home buyers feel like they are simply losing ground.
Fortunately, there are ways first-home buyers can get into the market faster and with a far smaller deposit.
One of the most popular options for many first-home buyers is to use a family guarantee or guarantor loan.
A family guarantee effectively uses the equity in another person’s property as the deposit that the bank requires. This is typically adult children using the equity in their parents’ home. Generally, the guarantor is required to be an immediate family member such as your parents, grandparents, or siblings.
This works by using your parents’ home equity as the 20 per cent deposit, with the balance of the loan secured against the property that you purchase.
It’s also worth remembering that the family member who acts as a guarantor can limit their guarantee to only that portion of the loan.
If your parents put up the 20 per cent deposit through their home equity, they would not be liable for the full value of the property you’ve purchased. However, this is something you should speak to your mortgage broker in Melbourne about.
The advantage of using a family guarantee is that first-home buyers can effectively get into a home of their own for very little money down. This is the same as being able to buy a home with a high loan-to-value ratio (LVR). Normally if you are buying a home and the LVR is above 80 per cent, you would be required to pay Lender’s Mortgage insurance (LMI).
LMI is a form of insurance that is in place to protect the lender, in the event the borrower is unable to manage their mortgage repayments and the home must be sold.
LMI can run into the tens of thousands of dollars and is a significant cost that borrowers need to manage if they intend to take out a loan with an LVR above 80 per cent.
The other advantage of using a guarantor-type loan is that first-home buyers are still able to access the various first home buyer grants. For many first home buyers, the ability to use the various grants and also be exempt from stamp duty is a major reason why they are able to get into the property market.
In recent times, first home buyers have been able to access other programs such as the First Home Guarantee Scheme which operates in a similar manner. But instead of family acting as the guarantor, it is the government.
This means that first home buyers are able to buy a home with as little as a 2-5 per cent deposit and they won’t be required to pay LMI. However, there are price caps on the properties you can purchase, and the program is limited to a certain number of buyers each financial year.
A family guarantee is a great way for first home buyers to get into the property market, but there are still risks involved that are worth thinking about.
The guarantor is putting their property at risk should the borrower default on their payments, which will be your parents and their family home.
The ability to get finance for a loan also depends on your ability to repay the debt, which is based on your income and expenses.
The first place to start is by talking to your mortgage broker in Melbourne, so they can assess your eligibility for the various types of loans and government schemes and also compare your options.
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