Saving a 20% deposit or paying expensive Loan Mortgage Insurance (LMI) are the only choices for people trying to get into the property market – or are they?
If you think you need a 90% or 95% loan, then let’s ask this question: Do your parents have a property?
Most don’t know about the simplicity of the modern day Family Guarantee loan, where borrowers tap into the guarantor’s equity to borrow 100% of the purchase price, plus legal costs and stamp duty.
These days, the guarantor (say, your parent or parents) do not have to move their home loan from their own bank and would be further comforted that their guarantee is limited to a nominated amount – not the entire loan amount like it was when my father did it for me.
What this means, in a worst case scenario, is that only the amount ‘pledged’ by the guarantor can be called upon.
Some buyers will still pay a 10% deposit and utilise a limited guarantee for the extra 10% to avoid the Loan Mortgage Insurance. Other buyers may have the 20% deposit but still rely on a Family Guarantee so that they can use their cash later on to renovate.
Sure, it’s not for everyone and it doesn’t suit all families. Even if parents have equity in their home to assist, there are other variables to consider, which your broker should go through with you. Some buyers initially say they don’t want to involve their parents, yet I always encourage them to have a chat about it.
Many parents like to put their equity to good use to help you out… especially when they see the LMI cost that would otherwise be payable.
It’s also often much ‘cleaner’ for parents to offer a guarantee rather than lend money to their kids, especially in bigger families. Remember, once the borrower has built 20% equity in the property, the Guarantee can be released.
The products and interest rate specials are the same as normal. By borrowing a higher amount the discount may be greater. As an example; by borrowing over $500,000 you will qualify for a full 1% off the standard variable rate for the life of the loan.
Beware of this – each major bank treat this product differently.
Some banks will not allow pensioners to pledge their equity – but luckily some do. There are two banks that allow a brother or sister, or child, to give a guarantee. These two banks, however, will not allow a term deposit to be put up by the guarantor.
Confusing? This is why you should utilise the free service offered by most brokers that should know, within minutes, where your loan should sit and then help you through every step.