Saving for a home loan deposit is one of the biggest obstacles for first-home buyers to get a foot on the property ladder.
While the Australian housing market is likely to take a hit from COVID-19, the national median dwelling value comes in at about $550,000, according to CoreLogic data as of March 2020. And homes in Sydney and Melbourne will cost a buyer well above this amount, typically $880,000 and $700,000 respectively.
How common is it to get help from the bank of mum and dad?
To achieve the supposed “Great Australian Dream”, a 20 per cent deposit is generally required if you want to avoid lender’s mortgage insurance (LMI).
For a property costing the national median, a deposit of that size is $110,000. If you put aside $200 a week, it would take just under 10 years to come up that sum, according to RateCity calculations.
But many young people have managed to skip this hurdle and secure a slice of the housing market, thanks largely to the bank of mum and dad.
About 20 per cent of first-home buyers get help from their parents, according to Digital Finance Analytics research. The average value of that help is about $75,000.
That adds up to $30 billion of financial assistance provided by the bank of mum and dad, making them the ninth biggest home loan lender in Australia, eclipsing the likes of HSBC, and AMP Bank.
What does it mean to have a guarantor on my home loan?
If you don’t have enough money for a 20 per cent deposit, your parents can help by going guarantor for you. Depending on the lender, the parents may be able to guarantee the entire loan or part of the loan, known as a limited guarantee.
Basically, by going guarantor, your folks are saying they will take responsibility for your mortgage repayments and any outstanding debt if you end up defaulting.
What this means is your parents are using equity from their own property to provide extra security for your home loan. They may guarantee only a part of your loan, by putting, say, $75,000 of their own property’s equity on the table to secure your mortgage.
In other words, if you default, not only does the bank have access to the property you’ve bought, it could also seize your parents’ house and resell it to get the owed money back in a worst case scenario.
On top of this, going guarantor could affect your parents’ ability to borrow money in the future if they intend to, as it may be recorded as a liability on their credit history.
You don’t need to be a banker to know that this sounds risky for the guarantor.
That’s why lenders generally only allow immediate family members to act as guarantor. In some cases, they might let extended family members help out, but this depends on factors such as the amount you are borrowing and the loan type.
But depending on your situation, it could make sense for you to have a guarantor on your side.
Benefits of getting a guarantor
While it is going to be different for everyone, here is why you might consider getting mum and dad to go guarantor for you.
- You can buy a property sooner – Even if you don’t have enough money right now to put down a 20 or even 10 per cent deposit, your chances of getting a home loan approved are likely to be much higher. This is because the lender can see you have an extra layer of security (your parents’ home), so they may be more willing to lend you those hundreds of thousands.
- You won’t need to pay LMI – If you have a deposit smaller than 20 per cent of the property’s value, you will be charged LMI. This insures the lender, not you, in case you can’t pay back the loan. LMI can set you back thousands of dollars. But with a guarantor on board, lenders generally don’t see the need for the insurance and you may be off the hook.
- You could borrow more money – Because your home loan application looks much stronger with a second security, you might even be able to borrow more money. In some cases, lenders could even lend you more than 100 per cent of the property price. This extra money could mean you won’t need to pay out-of-pocket for costs including stamp duty and legal expenses. But just because a bank is willing to lend you that amount, doesn’t always mean it is a good idea. Keep in mind you’ll need to pay interest on whatever you borrow, so the more you borrow, the more interest you’ll face over the course of your loan.
What you need to know about getting a guarantor
Having a guarantor on your loan, does not give you a free pass. You still have to be able to comfortably afford your loan repayments.
There are also potential situations you should consider. If you’re buying with your partner, it may be an awkward topic to discuss but think about what the plan is if you break up with them. There are also risks involved if you lose your job and source of income.
It is also not a good idea to assess your finances at the last minute. Make sure you have a consistent saving plan and budget before applying for a home loan, especially one with a guarantor.
Getting a guarantor may have complicated financial implications, so it is best that all parties involved have a good understanding of all the risks before jumping into a guarantor-backed loan.