PARENTAL ASSISTANCE LOANS
You parents may be able to help you own your property sooner
Have you ever had a conversation with your parents regarding assistance for your first home purchase?
Whilst it is not that uncommon for parents to gift their children large sums of money for the purpose of funding their first home deposit, the reality is that most parents can’t afford to gift money to their children. As housing affordability has worsened across the country, the equity of current home owners has grown whilst an aspiring first home buyer’s ability to save for their first home deposit has diminished.
For those who have parents who can afford to and are willing to help you out, here are the most common forms of parent assistance:
- Cash Gift
- Informal loan between yourself (the first home buyer) and their family members
- Family Guarantee
Whilst a parental guarantee for a first home buyer’s loan is still the most common form of assistance, new products & agreements are being introduced to protect the security the parents are providing. We look at these alternative assistance methods below:
TYPES OF PARENTAL ASSISTANCE
There are many types of parental assistance, click below to learn more about each of them:
Allows your parents to provide the equity in their property to be used as additional security for your loan
Allows your parents to provide a partial guarantee in their property to be used as security for your loan
Parents loan their children a certain amount with repayment conditions set out in a formal agreement
This can come in the form of a cash gift or a promise to repay the lent money in the future
BENEFITS OF PARENTAL ASSISTANCE
AVOID EXTRA COSTS
Parental assistance can help you avoid LMI (Lenders Mortgage Insurance) costs
PLENTY OF OPTIONS
FHBA Mortgages can help with you a range of parental assistance first home loan options
Your FHBA Coach will explain the entire process, benefits and risks to your parents
Parental assistance options are designed to help you get into the market sooner
WHAT IS IT?
Your family members can use their own home’s equity to provide additional security for your loan under a family guarantee. Under a full guarantee it is usually for the whole amount of the loan.
Family members who can give a family guarantee are parents (including step and in-law), spouse, de-facto, grandparents, siblings, children, brother in law or sister in law or legally appointed guardians
This solution reduces your loan to value ratio which in turn reduces or avoids the need for you to pay Lender’s Mortgage Insurance. (Your loan amount divided by the formal value of the property.) This can save you a significant amount of money as well as helping you get into your first home faster.
- Allows first home buyers to maximise the amount you can borrow so you can better compete with investors when hunting for your first home
- Getting a family guarantee doesn’t come with any extra costs or liabilities for yourself.
- Your family member won’t be liable forever. This option gives you the chance to release the guarantee when the guarantor requests this as a result of either the first home rising in value or paying down your loan.
Tom and Samantha are first home buyers. They have found a house they wish to buy for $400,000 (property 1). Their income can easily service a loan of $400,000 or more but don’t have the required 5% deposit saved up to meet lenders deposit requirements due to them renting prior to buying. Tom’s parents are willing to “go guarantor” for them and they own their home outright which is worth about $800,000 (property 2).
|Loan amount required:||$415,000 (purchase price + stamp duty and legal fees)|
|Security for the loan:||Property 1 (value $400,000) + Property 2 (value $800,000 with full loan guarantee)|
|Loan to value ratio (LVR):||$415,000 = 35%|
As the loan to value ratio is only 35% (< 80%) this would allow Tom and Samantha to purchase their first home without the costs of stamp duty.
WHAT IS IT?
Your family members can use their own home’s equity to provide additional security for a portion of your loan amount. This solution reduces your loan to value ratio LVR and can also save you a significant amount of money by reducing or even avoiding the need to pay Lender’s Mortgage Insurance. This allows you to get into your home faster, whilst limiting the help from your family.
With the partial guarantee/pledge products on the FHBA Mortgage’s panel, the guarantee can be limited to a specific amount, which helps provide certainty and allows the property to be released earlier than the full parent guarantees which cover 100% of the loan amount.
- By increasing your security through a guarantee from your family, you may be able to reduce or avoid paying Lender’s Mortgage Insurance (LMI). LMI is generally payable on loans that exceed 80% of the value of the property
- A Family Pledge can help you maximise the amount you can borrow so you can purchase the property you want – with the guarantee limited to a certain amount (e.g. 20% deposit + stamp duty costs)
- There are usually no extra fees with this option, as you still follow the same procedures for a normal first home loan
Tom is planning to purchase a $300,000 property with a $15,000 deposit (LVR of 95%), which means Lenders Mortgage Insurance (LMI) would be payable.
If Tom’s parents had a house valued at $800,000 but with only $200,000 owing on the mortgage and agreed to provide a family pledge guarantee of $56,500 as an additional security, the LVR would reduce to 80%.
This would result in the LMI premium requirement being waived, saving Tom up to $6,000 in Mortgage Insurance costs.
WHAT IS IT?
This strategy does not require parents to enter into any guarantee or place their property at risk.
It is simply an alternative way for parents to help their children (or grandchildren) get onto the property market ladder by structuring their financial assistance into a formal contract protecting both the parents and the child/children
It’s a formal loan from your parents – independently managed – to give you the borrowing power you need right now; protecting you and your parents.
- Parent decides the amount of money they will lend to their child and the interest rate to be applied on the parent portion of the loan
- This allows the parents to earn some income on the funds lent to their child and it doesn’t place the parent’s property at risk
- Your FHBA Coach will take care of all the paperwork and prepare the formalised agreement between yourself and the parent – providing security to both parties and ensuring everyone is protected and helps limit family disagreements over informal agreements
WHAT IS IT?
As most lenders require first home buyers to show a minimum of 5% in genuine savings (over the last 3 months minimum) or in previous rental payment commitments (if you are renting), this option is available to make up the deposit shortfall.
Whilst this strategy comes with risks as there are no formal agreements protecting the parents and the child if things turned pear-shaped, however it does provide flexibility for both parties and eases the pressure on the first home buyer.
It is important to consider the risks before committing to this strategy, your FHBA Coach is in a great position to explain the risks involved with the strategy and if this is an appropriate option for you.
- Allows first home buyers to maximise the amount they can borrow based on their income, ensuring the deposit piece is not going to be an obstacle.
- Helps first home buyers avoid LMI where you have saved a deposit of under 20% but have met the minimum genuine savings requirements
- Provides flexibility as the first home buyers and parents don’t have to commit to a formal binding agreement – helping especially where there is trust and verbal agreement between all parties
Tom and Samantha have saved $50,000 and are looking at purchasing a home for $400,000 approx. They are keen on avoiding Lenders Mortgage Insurance as their income won’t be enough to service a loan of more than $400,000 if they decided to capitalise the LMI.
Tom’s parents are able to help both by providing the additional funds to cover the 20% deposit, plus any additional costs such as Stamp Duty. However, Tom and his parents have a very close relationship and there is mutual trust between then, therefore the parents don’t want any formal agreements. They are happy for Tom and Samantha to repay the funds upon a rise in the value of the property whereby they can unlock the equity in the property.
This is a great option for Tom & Samantha as they don’t have the added burden of extra paperwork and stress of maintaining repayments to their parents.
WHY FHBA MORTGAGES?
We have access to a range of lenders that can assist with all of the above assistance measures
Your FHBA Coach will discuss with both the child & parent/s
FHBA Mortgages exclusively helps first home buyers with their first home loan!
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Disclaimer: The information on our website including this page is general in nature and should be solely relied upon. It does not take your personal circumstances. The credit license responsible for the mortgage service offered to clients is Mortgage Australia Group Pty Ltd, Australian Credit License (ACL) number 377294, Australian Business Number (ABN) 99 091 941 749. Mortgage Australia Group Pty Ltd is a member of the Mortgage & Finance Association of Australia (MFAA). FHBA Pty Ltd is an authorised credit representative of Mortgage Australia Group Pty Ltd.