No deposit home loan with a parental guarantee
With the average property price of a Sydney home being over one million dollars, saving a deposit large enough to purchase your first home is becoming near impossible. As a result, home loans with a parental guarantee are on the rise.
Prior to the GFC, Banks would lend borrowers 100% of the purchase price plus fees, meaning you did not have to provide a deposit, however, these days lenders have dramatically reduced the amount you can borrow when purchasing a property and the only way to get a home loan without a deposit is to have a Parental Guarantee.
Some Lenders will go up to 95% without a guarantor, but you will be required to pay Lenders Mortgage Insurance which can run into the tens of thousands. To avoid Lenders Mortgage Insurance, you need to have a deposit of 20% of the property purchase price plus fees.
Fees include conveyancer or lawyers’ fees which are approximately $1,500, inspections on the property which are approximately $400, government fees which are approximately $300, lenders fees which can range from $0 to $400, and stamp duty. Stamp duty varies from state to state and there are some exemptions on stamp duty available for first home buyers, depending on the property you are purchasing. Click here to access our online stamp duty calculator.
The result of the above means that the majority of first home buyers just can’t afford to save the deposit they need. A solution to this problem is getting a parental guarantee. Parental guarantees are becoming more and more popular as housing prices rise and lending criteria gets tighter.
With a parental guarantee in place, you can borrow the full cost of the property value plus fees. You will need to provide evidence to the lender that you can afford the repayments and may need to use, or at least show evidence of genuine savings.
What is a Parental Guarantee ?
A parental guarantee is where a percentage of the equity in a parent’s property is used as additional security for the home loan. This means the property that the son or daughter is purchasing, as well as a percentage of the parent’s property, is secured against the home loan. If a parent signs a guarantee for their child’s home loan, they are essentially agreeing to make the repayments on the loan if their son or daughter defaults or is not able to make repayments themselves.
It is imperative that anyone considering being a guarantor on a loan considers all the implications and gets independent legal advice. A guarantor does not have any rights to ownership of the property being purchase but they do have the responsibility of repayments if the loan goes into default. With such high risk factors, a guarantor needs to be positive that their son or daughter can make the repayments.
A good option for guarantors is to only guarantee a percentage of the loan. This means the guarantee amount is just enough to cover the deposit and initial loan costs only. Once this set amount has been paid off the loan, the guarantor can be removed and will no longer have any liability for the remainder of the loan.