Buying your first home is a huge milestone and whilst it’s a very exciting time in your life, it is potentially one of the biggest investments you’ll ever make. On average it can take first home buyers five years to save enough for a 20% home loan deposit. You will be happy to know that there are ways to get onto the property ladder a bit quicker, such as the First Home Loan Deposit Scheme, the First Home Super Saver Scheme, and a Parental Guarantee (otherwise known as a Family Pledge).
A Parental Guarantee Loan allows a family member to act as guarantor to secure your deposit, giving you more borrowing power. This can reduce your Loan to Value ratio (LVR) to under 80%, enabling you to avoid the added cost of paying Lenders Mortgage Insurance (LMI).
How does a Parental Guarantee work?
A parental guarantee home loan allows a close relative to either use cash (like tucked-away savings or term deposit funds) or equity from their home or investment property as security for part of your mortgage.
If you wanted to borrow $450,000 for a property valued at $500,000
Loan Amount ÷ Property Value = LVR
$450,000 ÷ $500,000 x 100 = 90%
With an LVR of 90%, LMI is applicable, which is an added cost. However, if you were to add a Parental Guarantee of $70,000 as additional security, the LVR on your loan reduces.
Loan Amount ÷ (Property value + Parental Guarantee amount) = LVR
$450,000 ÷ ($500,000 + $70,000) x 100 = 79%
With a new LVR of 79%, LMI would no longer be required, which could be a significant saving.
The pros of having a parental guarantee:
- Allowing the ability to potentially borrow 100% of the purchase price of a property plus costs such as stamp duty and solicitor expenses.
- With extra borrowing power you may be able to choose a property that is a better fit for your family – a better suburb, more bedrooms etc.
- You can get on the property ladder sooner.
- You might avoid the added cost of LMI.
Things to think about before you agree to take on the role of a parental guarantor:
- This is a massive commitment that should not be taken lightly, legal advice is always recommended and is often a compulsory requirement from the lender.
- You will be liable for the amount you guarantee. That means you’re promising to pay that amount if the borrower can’t repay their loan and defaults. If you choose to use a Term Deposit as security, the whole deposit amount could be used. If you choose to use your home’s equity as security, your house may be sold to cover it.
- While acting as guarantor, your ability to borrow may be reduced.
The guarantor can be released from the guarantee as soon as the LVR drops below 80%. There is no need to wait until the loan has been fully repaid. You will be required to seek independent legal advice before offering to guarantee a loan.
If you would like more information about having a family member help you get your foot on the property ladder, please don’t hesitate to contact one of the friendly Seek Financial team members. We are always up to date on all the latest schemes and options available to first home buyers and have access to a wide panel of approved lenders. On top of that, we can come to you at a time that suits and will hold your hand every step of the way. We’d love to help make your property dreams come true sooner.
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.