Buying a house is likely the biggest investment you will ever make and recently getting into the property market has become more difficult than ever. Property prices in Hobart have increased by more than 35% over the last 3 years and lenders have been cracking down on lending criteria. These factors have combined to make buying a home seem out of reach for many Tasmanians. Thankfully, Finance Brokers of Tasmania may have a solution for you that is often overlooked and under utilised by other brokers and financiers.
Recently released statistics show that almost 50% of first home buyers rely on help from their parents when buying their first home. This typically comes in the form of a ‘gift’ or loan to contribute to the deposit or cover other upfront costs such as stamp duty. Whilst a gift from the family can be an effective way to get into your first home, parents aren’t always in the position to part with large sums of cash. Luckily there is another solution available for parents and first home buyers – parental guarantee.
What is a Parental Guarantee?
Under a parental guarantee, your parents (or another family member) can use the equity in their home to provide additional security for your loan. The guarantee is only for a small portion of the loan, not the entire loan amount. A parental guarantee reduces your loan to value ratio which can reduce or even avoid the need to pay Lender’s Mortgage Insurance (LMI). This can save you heaps of money as well as getting you into your new home faster.
What are the advantages of a Parental Guarantee?
Helps reduce or avoid Lenders Mortgage Insurance, saving you money.
Helps you access the market sooner.
Maximise the amount you can borrow – up to 100% of the purchase price plus costs such as stamp duty and legal fees.
Get help from your parents without having to ask them for cash to contribute to your deposit.
There is no additional cost to have a parental guarantee loan.
Your parents property can still have money owing and it doesn’t matter which lender the loan is with.
Your parents wont be liable forever. They can be released when the LVR drops to a suitable level.
Are there any risks or disadvantages?
If you have a parental guarantee and you are unable to make your loan repayments when they are due, the lender may ask your family member (the guarantor) to pay the guaranteed portion of your loan. It is really important that your guarantor is aware of the risks and seeks independent advice before entering into an agreement.
How does it work? Here’s an example.
First home buyer, Ben, is planning to purchase a $400,000 property with a $20,000 deposit. This represents a loan to value ratio (LVR) of 95%, meaning Lenders Mortgage Insurance (LMI) would be applicable. Ben’s parents have equity in their home so they could provide a parental guarantee of $60,000 as additional security on the loan. This would reduce Ben’s LVR to 80%, meaning Ben would avoid paying LMI, saving him up to $13,200.
In certain situations, if Ben didn’t have any deposit his parents could provide a parental guarantee of $80,000+ and enable Ben to escape the rental trap and get into his own home. In this scenario, certain conditions would need to be met before eligibility could be determined.
Why get a parental guarantee loan?
As of May 25 2018, the median rental price for an apartment in Hobart was $440 per week whilst the average weekly earnings are $830.90. This means that the average independent single person is spending 52.95% of their weekly net income on housing. Getting into your own home can be affordable and is now possible even if you don’t have a deposit.
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