With the median house price in Perth currently $535,335 (an increase of 8.6% in the last 12 months), it means to avoid paying lenders mortgage insurance a first home buyer would need a deposit of over $131,000.
With rental costs so high, trying to save for a big deposit can seem an impossible task. There is a way to get into a property sooner and many lenders will allow parents and in some cases siblings to allow their property to be used as security to bypass the requirement for a deposit and paying lenders mortgage insurance.
There are other advantages as well. Guaranteeing a loan can not only enable your child to purchase much sooner but may also enable them to purchase a more suitable property in a suburb that better meets their needs and not having to purchase further away from the city or a much smaller property.
What is a guarantor?
A guarantor is someone who agrees to be responsible for repaying a debt owed under a guarantor agreement if the borrower cannot make the repayments.
There are risks to a guarantor agreement and many lenders will insist on legal advice being taken prior to a guarantor agreement being made. If you can’t make the repayments, the lender may sell the property and if there is not adequate funds to cover the debt then they could enforce the sale of the guarantee property too.
Some things to consider
There are some things to consider that could impact you before you jump into an agreement:
- Will you be selling the security property in the near future?
- Do you have options to switch the guarantee if your property is sold?
- Are you going to need the equity to use for your own future borrowing requirements?
- Do you have plans of your circumstances change?
- Are you prepared to pay the loan if the borrower defaults?
- Do you have an understanding of the duration of the guarantee?
- Are you feeling pressured to become a guarantee?
Minimising the risk – other options
There are ways to minimise the risks. The most common is using a monetary gift or private loan. This would often involve using your property to secure a loan and then gifting or loaning the money to your child. If you are loaning ensure that you have a legal agreement in place.
Another way to avoid the risk is to buy the property jointly with your child. This means your name is on the title and you have a certain percentage entitlement. Purchasing this way may mean that any first home buyer benefits may not be available.
When it comes to guaranteeing a loan, it’s always sensible to speak to a professional. You should also consider asking a legal professional to draw up a formal loan document outlining all conditions of the loan, interest rate and expected repayments.
Finally, outline an exit strategy. Financial situations change and, as the loan decreases with repayments, there may be an opportunity for you to withdraw your support to free up your assets without impacting your child’s loan.
If you’d like to find out more speak to an accredited finance broker, you can discuss direct with Fox Mortgages, call 08 9304 9682 or visit www.foxmortgages.com.au.