Many first home buyers 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
Simon 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 Simon 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 Simon.
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 Simon buy his first home.
Lending structure is that Simon 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 Simon to buy without a deposit.
As Simon 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.
What can go wrong?
In this situation, if Simon 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 his parents may have to come up with some funds.
Thankfully there are safety measures that can be put into place to reduce the chances of this happening.
For example when setting up the loan, a good Finance Broker would ensure Simon's parents receive copies of all loan statements each month, allowing them to monitor that the payments are not falling behind.
If you are a parent, we recommend you speak to one of our Finance Brokers before you commit to buying any property using a Parental Guarantee. They will ensure that this and all other safe guards are in place before any commitments are made.
This may or may not be the strategy for you, but it is a popular way of helping your kids get into their first home without costing hard working parents any money!
Want to know more? You can download our first home buyers guide or give us a call on 1300 187 894
*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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