Saving for a home loan deposit has become increasingly difficult in Australia’s cities. Why? In a nutshell, property prices continue to rise across most of the major metropolitan areas.
In Sydney and Melbourne for example, property prices have risen by over 60% over the past several years.
As a result, the deposit a first home buyer needs in order to purchase a property and get their foot on the property ladder continues to grow.
For most first home buyers, saving the deposit is the single biggest hurdle they face. You may have the salary needed to comfortably afford your regular mortgage repayments, but are struggling to build up your savings.
If you’re looking to buy your first home but need help getting there, enlisting the help of a guarantor may be just the ticket.
How does it work?
Lenders like to deal with borrowers who have a large deposit. Ideally, as a first home buyer, you will have saved at least 20% of your desired property’s purchase price.
Of course, the reality is most first home buyers don’t have this level of savings in their bank account. Which is where your guarantor comes in.
Your guarantor (which is usually an immediate family member) allows the equity in his or her own property to be used as additional security for your loan. The primary security for the loan will be your property, but the lender will also take a mortgage over your guarantor’s property. This mortgage will not support the loan directly but will be used to support a guarantee from your guarantor.
What are the benefits?
Having a guarantor to support your loan usually avoids the requirement for Lenders Mortgage Insurance, (LMI). This can save you thousands of dollars.
Also, your required deposit may be less than otherwise required.
Are there risks involved?
Yes, guarantors are liable for your loan. In other words, if you default on your loan, your guarantor will become responsible for paying off your mortgage.
This is likely to be a huge financial impost on your guarantor and not something you would want to put them through.
Is it right for me?
Some lenders are willing to lend up to 95% of a property’s purchase price, but if you want to take advantage of historically low interest rates and the incentives offered by state governments, you may not want to wait until you have a huge deposit saved.
If you’re considering asking your parent to become your guarantor, or you’re a parent considering becoming the guarantor on your child’s home loan, speak to us so that we can help you determine what is involved and find a solution that satisfies both parties.