With property prices in Australia continuing to rise the dream of home ownership is becoming a real challenge for a lot of people. With the need to save a minimum 5% deposit, in addition to at least another 5% to cover costs such as stamp duty, It can often seem too difficult, which sees many people commit to a life of renting.
Well there could be another option. With over 50% of Australia’s wealth sitting with baby boomers, banks have developed products which can help you buy your first home through the use of your parent’s property.
The way it works is, your parents offer their home or investment property as security for first home buyers. The bank takes what is known as a ‘limited guarantee’ over your parent’s property. Through a limited guarantee your parents are only offering a fixed amount of their property as security. As the borrower of the loan, you still need to demonstrate you can afford to repay the entire amount.
First home buyers Jill and David are looking to purchase a new home for $700,000, they have saved $35,000 (5%) which they need to cover stamp duty and other costs. David’s parents have no mortgage on their home, worth $1,500,000 and have offered it as security to Jill and David.
The couple speak with a mortgage broker, who suggests a Family Guarantee (also known as a Family Pledge) loan. They approach a bank who agrees to approve the loan for the full amount plus costs for $730,000. The bank takes a limited guarantee over David’s parent’s property for $170,000 or 20% of the purchase price plus cost. This removes the need for David and Jill to obtain Lenders Mortgage Insurance (‘LMI’), saving them thousands of dollars.
David’s parents are guarantors to the entire loan, but the security of their property is only limited to $170,000. As guarantors David’s parents receive loan statements and are able to ensure Jill and David are making all their loan repayments.
In a few years when Jill and David’s property has hopefully increased in value, they are able to approach the bank and seek to have David’s parents property released from their loan.
Purchasing a home with this method can save you money and get you into the property market a lot faster. You do need to have willing parents with equity in their home or an investment loan. Also before making any big decisions like this, it is always strongly recommended to seek advice from a professional.