Quickly text your mum and dad and tell them how much you love them because in 5 minutes I’m about to explain how they can help you into your first home easier than ever, without the traditional guarantor risk of losing their own home!
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You're in for a treat...
You see it every time we turn on the news, read the Saturday paper, and check the latest market updates on Facebook. If you belong to generation Y to Z give up that great Australian dream - owning your own home is far too impossible it would seem. Even if I cancel my Netflix subscription, put down that soy latte double decaf, how unimaginable is it to be able to save a deposit large enough to buy your first home?
Back in the 1980’s, a 20% deposit was about the average yearly income, nowadays it is more like 4 times the annual yearly wage. Most intriguing, though, is that a lot of average income earners can actually afford to make the repayments on a loan, yet to save the deposit whilst paying rent and bills could take 10+ years . . . . imagine house prices then! What if I told you that it is STILL POSSIBLE and that you may NOT NEED A DEPOSIT AT ALL? Sounds interesting right?
Nearly half of all first home buyers turn to their parents for help commonly through either cash gifts or loans. Whilst every parent dreams of helping their kids in one way or another, it is also becoming harder for them to have a spare $80,000 cash under the mattress. The burden of putting their beloved home down as a guarantor can lead to very messy and bitter family feuds, and no one wants to deal with that at Christmas time!
Sounding like you don’t have many options but to take up that second or third job right? That used to be your only option, but now there are some new options available where parents can still assist via a family pledge guarantee.
What is the family pledge guarantee?
Provided the parents have enough equity in their existing home loan, family members can use their own home’s equity to provide additional security for a significant portion of your loan amount. This solution reduces your loan to value ratio and can also save you a significant amount of money by reducing, or even avoiding, the need to pay Lender’s Mortgage Insurance. In layman’s terms, provided you can meet a banks' repayment terms, you can essentially “borrow” a deposit using your family members equity as a security. So you get into your home faster, with help from your family and no cash has to change hands.
How It Works (The Fine Print)
A family member allows a child to secure a specific amount, usually up to 20% of the purchase price on their home. By increasing security through a guarantee from your family, you may be able to reduce or avoid paying Lender’s Mortgage Insurance. Lender’s Mortgage Insurance is generally payable on loans that exceed 80% of the value of the property.
Both the borrower or guarantor can ask for the release of the guarantee (subject to approval) when the standard Loan to Value Ratio (LVR) requirements are achieved, ie; They have achieved the acceptable level of equity in the property by either paying down the loan or the property going up in value.
Provided there is enough equity, a family member may allow multiple children to secure a family pledge guarantee.
Another important note to make is that the child can still access the first home owners grant, plus it takes a lot of the financial burden of their parents. Also by saving money on LMI they also get more financial muscle so they can buy a bigger, better house or move into the desired suburb of their choice (right next to mum and dads house?). Of course sacrificing some minor coffee addictions and maybe substituting a night on the couch instead of a night on the town will also go a long way to helping you save that little extra (I’ll be keeping Netflix for now).
Making it happen.
Sign me up you say! This awesome option will pave the way for making it easier for children to secure their first home and helping parents say yes to helping out. I work with Adam Wallace-Harrison at Loan Market to ensure my clients get the best possible financial service available. A simple five-minute phone call with Adam on 0412 948 488 can unlock many potential ways to get you into your home quicker, and also potentially reduce your parents interest rates on their current loan.
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With these exciting new laws, so many more people will be able to buy their first home and start investing. If you have any financial or property questions please don’t hesitate to contact me today!