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What can I do if I don’t have enough deposit and the bank won’t lend me the money.

Before you read this post take a moment to learn about  the new First Home Owners Deposit Scheme which can help first home owners save for a deposit possibly eliminating the need for them to take our Mortgage Lenders Insurance.

Using a guarantor to help you achieve you home ownership goals

The easiest way around the deposit dilemma is to garner the support of your parents or close family members who already have considerable equity in their own homes, and are willing to support you by ‘guaranteeing’ your loan. In other words, you need someone to ‘go guarantor’ for you. Essentially, a guarantor is a close family relative, usually your parent/s, who has either paid off their own home or has a significant amount of equity in it. They must be willing to put that home up as security against your loan, and agree to cover your loan repayments if you default.


Most lenders offer guarantor loan products for first home buyers, although they go by different names, depending on the financial institution. Terms you might hear that refer to these types of arrangements include:

  • Family Pledge
  • Family Support
  • Family Equity
  • Fast Track
  • Family Guarantee

Guarantor loans have many benefits for the borrower:

  • You can get into the housing market more quickly
  • You can borrow the money to cover your deposit if you don’t have enough savings
  • You can borrow 100 per cent of the cost of the purchase
  • You can avoid LMI, which can be significant

The main risk for the borrower is that they may be enabled by the guarantor to take on a larger debt than they can really afford.

The guarantor, however, faces a number of risks:

  • They agree to put up all or part of the equity they have in their own home as security for the borrower.
  • They may have to cover loan repayments if the borrower’s circumstances change.
  • They may need the money back for an unseen change in their circumstances before the borrower is able to repay the funds.

While going guarantor can be risky, there are ways to minimise the risk. The amount of equity offered as security doesn’t have to be 100 per cent. It can be limited to an amount that equals the deposit required by the bank. This means that you can go ahead and borrow at ninety-five per cent LVR or less, and the guarantor’s security arrangement covers the other five per cent or more. Once you have repaid an amount equal to the guarantee, the guarantor can be released from their obligation to cover your payments, pending approval from the lender.

Another downside of applying for a guarantor loan is that the approval process can be quite lengthy. The lender will need to assess the value of the security being offered and the financial status of the guarantor.

parent assist loan

Here's how your parents can become your bank

Apart from actually gifting you the money or guaranteeing your home loan with the lender, there is another option whereby parents can avoid risking their own financial situation or their home. It is a formal, managed loan through a bank or lender and it helps to keep everything above board and official.

This new product is called a Parent Assist loan. Basically, it takes the form of a structured loan between you and your parents and can cover an amount up to 100 per cent of the purchase price, depending on what your parents are willing to lend you.

A typical example might be that your parents lend you twenty per cent of the purchase price: equivalent to a deposit. And then, the bank provides the rest. You repay both your parents and the bank with interest. In some instances your parents might agree to accept a far lower interest rate than the bank.

Not all lenders offer this kind of loan, and the guidelines and eligibility factors may differ from regular home loans.

There are a whole bunch of baby boomers out there who own their own homes outright and are sitting on hundreds of thousands of dollars in equity. Using this scenario, they can make a real difference to their children’s lives. So if you are that special, trusted and deserving son or daughter with equally trusting and deserving parents, then you should ask them about this. What have you got to lose?

build in oz case study

HOW ONE WOMEN GAVE HER SON THE GIFT OF HOME OWNERSHIP

The Story

In 1998 at age 41 Linda purchased her first home for $93,000 in regional Victoria.  She was raising two children as a single parent and had been saving for a deposit to buy a home for about 10 years. Slowly over the next sixteen years she spent a further $100,000 renovating her home giving her a mortgage of approximately $200,000.  Linda then inherited $130,000.  She used that money to pay down her mortgage leaving her sitting comfortably with $70,000 owing on her home.

The How

In those 16 years, property prices rose some 400%.  In 2016, Linda’s home was valued at $450,000 meaning that the equity she now had in her home was $380,000.

The Why

This equity enabled Linda to help her son achieve home ownership by lending him $100,000 of her equity for him to use as a deposit to build his new home.

The Solution

A mortgage broker was able to help them structure a legally binding parent assist loan which made it possible for Linda to safely lend her son the money which he paid pack with interest as per the same arrangement he would have with any other lender.

The Benefit

The money borrowed from his mother’s equity went a long way in helping her son get started on his home building journey which meant that he could stop paying dead rent and put that money into his own place despite not having a deposit.

in summary

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Explore creative pathways to home ownership.  Consider if there is someone close to you who would consider entering into a legally binding agreement that enables them to effectively function as your bank for part or whole of your required funds.

 

quote

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Instead of thinking outside the box, get rid of the box

- Deepak Chopra

Disclaimer

This information is of the nature of general comment only, and does not represent professional advice nor should it be substituted for professional advice. Whilst attempts have been made to ensure the accuracy of the information, we don't guarantee it's accuracy.  Any information we provide is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. You should always obtain professional advice before making any decision to purchase property of any kind.  We recommend you seek professional financial advice prior to entering into a contract of any kind.   Build In Oz disclaims all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this course.  Please refer to our privacy and disclosure statement for further information.



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