Many first home owners are on good incomes but struggle to get a big enough deposit together to purchase their first home. Luckily with the help of a loving parent/s, there is a way of getting a home loan, without needing the massive deposit.
It’s called a Parental Security Guarantee!
A Parental Security Guarantee is simply, parents giving up some equity in their family home to assist their adult children buy their first home.
Here is an example of how it works
Jerry is a 25 year old Mechanic, earning $60,000 per annum.
He owns his car, has a credit card with a $2000 limit and $6000 in savings.
He wants to buy his first home for $400,000. Most Lenders will require Jerry to have 5% deposit or $20,000 in savings. Although he can afford the repayments, his deposit is not large enough. Even if he had the required deposit he would have to pay a large amount of lenders mortgage insurance as he is borrowing over 80% of the property value.
Peter and Jenny (his parents) want to help their Son Jerry.
They have a family home worth $500,000 with a $200,000 home loan.
To avoid lenders mortgage insurance, Peter and Jenny are prepared to put up their home with a limited guarantee of 20% of the property value.
In other words they are prepared to assist by guaranteeing $80,000 of the equity from their home to help Jerry buy his first home.
Lending structure is that Jerry borrows the full $400,000 and must prove that he can afford the full amount of the loan. Although Peter and Jenny are not borrowers they are providing 20% equity of the purchase.
This does two things:
1. Avoids Lender Mortgage Insurance.
2. Allows Jerry to buy without a deposit.
As Jerry pays down the loan and his property value increases the equity in the property increases. Should there be enough equity to cover the amount his parents guaranteed, then at this point, they can be released of their responsibility.
Setting up the correct structure to minimise risk is of paramount importance.
If Jerry does not make payments to the home loan then the property would need to be sold to clear all debts, if there is a shortfall parents may have to come up with some funds.
It is important in this situation before buying you speak to our Finance Brokers to ensure that your structure minimises risk. There are other safety measures that can also be put into place such as ensuring parents get copies of all loan statements each month.
This may or may not be the strategy for you, but it is a popular way of helping your kids MOVE OUT without costing hard working parents any money!
We always recommend you seek legal and financial advice in these matters.
Want to know more? You can download our first home buyers guide or give us a call
*This article is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser.
PEB Property Group is a complete financial planning advisory service for Perth families. Offices are located in Inglewood and Willetton, Perth, Western Australia and offer - Financial Planning · Finance Broking · Property Management · Real Estate Sales · Property Investment · Development.
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PEB Financial Planning is a trading name of PEB Group WA Pty Ltd ACN 142 958 254. Rebecca Howarth and Howarth (WA) Pty Ltd trade as PEB Financial Planning. Rebecca Howarth (ARN 244928) and Howarth (WA) Pty Ltd (ARN 433328) are Authorised Representatives of NEO Financial Solutions Pty Ltd. AFSL 385845 | ABN 64 141 607 098.