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.
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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 – Allows your parents to provide the equity in their property to be used as additional security for your loan
It is important to note that gifts & informal loans can get so complicated that it may sour the relationship between the family members.
There are multiple ways a parent can help their kids buy their first home
Overtime, the Australian Financial Services industry has introduced new & innovative products enabling parents to assist their kids with their first home purchase. 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
This is our first blog of a 2 part series on way’s parents can assist children with their first home loan. In Part 1 (below) we will look at the more conventional method parents can help their kids in obtaining a home loan – the family guarantee. Please stay tuned for our next blogs as we look at the more innovative & unheard of ways parents can assist their children.
What is a Family Guarantee?
Family Guarantees (e.g. the parents acting as guarantors on their children’s home loan) is the most common form of assistance for your first home loan. Generally when buying a home you require a deposit of 20% of the purchase price if you want to avoid paying Lenders Mortgages Insurance (LMI). Having a family guarantee allows family members to use their own home’s current equity (current value of home, less any mortgage outstanding) to provide additional security for your loan.
What are the benefits of a family guarantee?
- Get into your first home sooner than if you save the deposit by yourself
- Avoid Lenders Mortgage Insurance (LMI)! LMI is a lender imposed insurance cost on top of your home loan if you have a loan to value ratio of greater than 80%. LMI protects the lender in the event you default on the home loan (not you, the borrower). A family guarantee acts to reduce your loan to value ratio, thereby saving you a significant amount of money on LMI.
- No additional cost to get a family guarantee set up (in most cases)
- Your family guarantee provider won’t be liable to provide the security forever. Once the equity in your property goes up to the point where your loan is covering 80% of the total property value, then the guarantor can be released from providing the security
Are you one of the lucky ones to potentially receive parental assistance for you first home?
Are there any disadvantages of a family guarantee?
There is always some degree of risk when dealing with financial products, investing or taking out a loan. A family guarantee is no different, especially if your circumstances change and you are unable to meet your loan repayments when they are due. This may force the lender to use the guarantor’s security to cover these losses (e.g. the parents’ home). Therefore, it is very important for the guarantor to seek independent financial and legal advice so they are aware of the risks associated with a family guarantee.
If you are interested in exploring a family guarantee further and see if this can help you, our FHBA Brokers can help you. FHBA Mortgages, powered by Mortgage Australia, have many years of experience with helping first home buyers with family guarantee loans.
An FHBA Broker will help by guiding you and your family members who may become your guarantor.