First home buyers are becoming super active at the moment given reduced stamp duty, the First Home Owners Grant, the builders boost and record low interest rates.
While undeniably COVID-19 has us all staying home and most likely spending less, saving for a deposit is still one of the biggest hurdles for first home buyers.
Many are turning to a parental guarantee for this purpose and kids and parents alike seem to see the benefit.
So what is a parental guarantee?
A parental guarantee is a structure offered where your parents offer a property of theirs as additional security to cover off the gap between your current savings and 80% of the value of your proposed purchase.
This strategy does nothing for affordability – that is an entirely different question, it only addresses a savings or equity shortfall. This is provided by a mortgage so is not entered into lightly – but can also be released when the property has sufficient equity to be refinanced out or stand on its own.
A good guarantee structure – and they are not all the same – will;
Limit the exposure of the guarantors to just this gap and minor costs
Not require the guarantors to refinance or rejig their finances
Not require the guarantors to provide too much in the way of income evidence – on this note though, we are charged with protecting our guarantors and ensuring there is a means for them to extinguish the guarantee without losing their home if you defaulted on the loan – and this is the risk potential for guarantors, so may discuss other means like paying it off, or superannuation – better still other assets than the family home.
Allow the guarantors in this worst case to make the payments on the limited guarantee portion to extinguish it before any sale of their assets is discussed.
One guarantee will also allow first home buyers to consolidate a small debt – ultimately making repayments more affordable – and release some cash out for home improvements; providing the guarantors agree.
This type of guarantee may also be available for those buying a home to live in who already hold an investment, but there isn’t enough equity in the property to aid the home purchase.
Again, these are not intended to risk your parents property in order to assist you to build your empire, but a sensible approach can be taken in cases where it makes sense to use a guarantee, and for a lot of borrowers saving and paying rent may just be too hard.
The positives are obvious;
Fast tracking your entry into the market,
No need to save a deposit at all (although if you have one saved you’ll be able to lift the guarantee sooner),
Access to cheaper interest rates than if you entered with a small deposit.
Potentially allowing you to complete renovations on a bargain property (which also has the potential to improve its value
We are very blunt in our warnings to both parents and borrowers – it’s a mortgage and must be treated seriously.
If you stop making your repayments you are risking your own and your parents property.
There is some complexity and time involved in establishing – but not too onerous.
Most lenders require parents to seek legal advice, and this is usually done AFTER it’s too late for you to exit the property purchase (probably my one bug bear).
On paper, it will look like one loan in most cases, you will bear the burden of all repayments and receive all the statements. Its your responsibility entirely.
The bank also won’t initiate release of the second security – this is important to note, and we recommend you keep an eye on the market around you.
In most cases the market will do the heavy lifting of building your equity while you chug along making repayments, until the time you can have a valuation done on your place, realise your loan is now 80% of the new value and apply to release the guarantee.
Now – there is no specific time frame for these however in our experience it has often looked like around five years.
In terms of the approval process, be prepared to answer a few more questions around your income stability in light of COVID-19 and any impact it may have had to your finances, and borrowers must have a clear credit history, but the good news is where line by line expense analysis is occurring for most of us we are seeing reduced expenses and this makes a good opportunity to both save and show our ability to afford our proposed new home.
Rebecca Jarret-Dalton is the Founder of mortgage broker Two Red Shoes.