How first home buyers are getting into the market (and how you can too)
The number of first home buyers is surging, but how are they getting into the property market? We let you in on their secret.
In spite of sky-high property prices, first home buyers are making moves in the property market. In fact, the proportion of first home buyers taking out a home loan rose to 15% in June, according to the Australian Bureau of Statistics. This was the highest level of first home buyer participation in two-and-a-half years.
If you’re on the outside of the property market looking in, this can seem pretty perplexing. How are other first-time buyers getting into the market when you can’t? Well, anecdotal evidence suggests the answer is guarantor loans.
Westpac consumer banking head George Frazis recently told the Australian Financial Review that 75% of the bank’s first home buyer customers got into the property market with the help of a guarantor. Mortgage broker Zak Avery of Blue Fox Finance has seen the same trend.
“I’ve noticed a high percentage of first home buyers getting help from their parents either through a guarantor loan or a monetary gift,” he says.
“I think a lot of parents are now looking to help their children buy their first home as it’s currently a much easier and cheaper option than buying themselves an investment property and allowing their kids to reside there.”
So what is a guarantor loan, and how can you get one?
What are guarantor loans?
A guarantor loan is a loan where a parent or close family member offers their own house as security to allow you to get into the property market without a deposit.
“A guarantor loan can cover your entire deposit and fees when buying your first home,” Zak says. “By setting up a guarantor loan, the parents won’t have to front any funds, and can instead use their property to provide additional security to the bank.”
You see, a bank usually requires a cash deposit to lend money for a home purchase. It can be as low as 5%, but many banks require at least 20%. A guarantor loan eliminates the need for a cash deposit, because your parent or family member offers their own home as a guarantee.
This usually means you can get into the property market without a deposit. In some cases, a lender may require you to front up some cash of your own, but it’s usually as low as 5%.
But, if a lender still requires a 5% deposit with a guarantor, why use a guarantor instead of just saving the 5% yourself. The answer is LMI.
LMI stands for lenders mortgage insurance. It’s an insurance policy that covers your lender in the event that you default on your home loan. Even though LMI covers your lender, you’re the one who has to pay for it, and the cost can run into the thousands of dollars.
LMI is charged when you don’t have a large enough deposit. In general, if you haven’t saved at least a 20% deposit, you’ll be hit with a charge for LMI.
The good news is that a guarantor loan eliminates the need to pay LMI. Even if you do have to provide 5% of the deposit yourself, your guarantor’s property makes up the rest of the deposit.
What are the drawbacks of guarantor loans?
As long as you make all your repayments, a guarantor loan should be no different than a regular home loan, Zak explains.
“The only dangers arise if the borrower doesn’t repay their loan. If the bank is forced to take legal action then the parents can be liable for up to 20% of the purchase amount,” he says.
This is where guarantor loans can cause trouble. Because your parents are putting their house up as security, they’re liable for your debt if you don’t repay it. This means you have to be certain that you’ll be able to make the repayments on any home loan you get through a guarantor. You don’t want to risk damaging your relationship with your parents or family because you get in over your head with a home loan.
The good news is that the guarantor relationship is temporary. Once you’ve paid enough of your home loan and your home has risen in value enough that the amount you owe is less than 80% of the value of the property, your guarantor can be released and their obligation ends.
How do I get a guarantor home loan?
A guarantor home loan is actually two loans. One is the loan to buy your property, and the other is a second mortgage on your parents’ house.
While this can sound a bit complicated, many lenders have structured guarantor products to make the application process as straightforward as possible.
In the table below, you can find home loans that allow a guarantor. Compare the loans, decide the one that’s right for you and then click on any of the links to go through the application process.
Remember, though, that the decision to use a guarantor is one that should be taken seriously. Your parents are putting their home on the line to help you achieve your property dreams. Before they dive in, they might want to consult a solicitor to help structure the terms of the guarantor agreement between you.
What if my parents won’t go guarantor?
Not everyone has the luxury of using their parents as a guarantor. Fortunately, there are still ways to save for a home loan deposit without using a guarantor. You can read our detailed guide here.
Compare guarantor home loans
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