How To Use Your Parents Support To Buy Your First Property

FINANCE
01-Aug-2017

The difficulty that first home buyers face when trying to break into the Australian property market has been widely documented. As property prices in several capital cities continue to soar, the prospect of buying a home is a long way off for many young Australians.

If you’re struggling to save the deposit (and any other associated costs) for your first home, here’s how some parents are helping their kids get a leg up and into the game.

Going Guarantor

A family guarantee is a type of guarantee that can be made to help secure a property. This is done by securing the deposit shortfall to a property owned by the guarantor, such as your parents or sibling.

A family guarantee allows the bank to use some of the equity in your parent’s property to help out as extra “security” for your loan.

It works because the bank will take a mortgage over both your property and the guarantor’s property, meaning they have more ‘security’ for the loan.This ensures the Loan Value Ratio (LVR) is maintained at an acceptable ratio and removes the requirement for Loan Mortgage Insurance (LMI).

These days, the guarantees are different from the old style guarantees, where mum and dad put their whole house on the line. The guarantee is limited to the amount of security being provided, typically between 10% - 20% of the purchase price of your new property. The loan remains in your name - not your parents.
 

Let’s look at an example of parents’ going Guarantor

 

Normally, if you want to buy a property for $400,000, you would need to save a $40,000 deposit, plus the stamp duty and legal costs. The maximum loan a lender may consider is 90% LVR, plus the LMI premium.

Say you only have enough money saved to cover the stamp duty and legal costs - then you need to borrow the full $400,000. Assume your parents own their property outright, worth say $500,000 and they are happy to lend you $80,000 (20% of the purchase price). This will cover both your 10% deposit required to secure the property, plus the balance equity you need to maintain your LVR to 80%. This will save approximately $8,000 by not requiring mortgage insurance. The loan will be in your name and your parents will provide a guarantee for $80,000 with the bank registering this interest on your parent’s property.

This is purely an example, with the level of equity needed in your parent’s property varying from lender to lender, depending on individual circumstances.

Your parents will need to sign bank papers, provide relevant information and their property title details to the bank and possibly get legal advice. Not all banks allow family guarantees, so it’s best to see a good mortgage broker.

Who can be a guarantor?

  • Parents
  • Siblings
  • Spouses
  • De factor parents
  • Grandparents

What factors are taken into consideration?

  • Age
  • Income
  • Amount of equity in their security
  • Where the property is located

 

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