According to Mortgage Choice’s annual First Home Buyer Survey
, rising property prices are causing more parents to become guarantors on their children’s home over the last few years, particularly in Sydney and Melbourne where property prices are the most expensive.
The First Home Buyer Survey revealed that 4.9% of all first home buyers had a parent of immediate family member go guarantor on their home loan. This was up from 3.9% in 2015 and 3.8% in 2014.
According to Mortgage Choice chief executive officer John Flavell, “This slight jump in demand for home loan guarantors is unsurprising when you consider that property prices have risen fairly substantially across most property markets over the past few years.”
Data from CoreLogic also reveals that property prices for the combined capital cities rose by 8.3% over the last financial year, with Sydney and Melbourne seeing the greatest amount of growth.
Flavell stated, “Given that property prices continue to rise month after month, it is little wonder why so many first home buyers are finding it difficult to put a foot on the property ladder without some form of financial support.”
“By having a family member go guarantor on a home loan, first home buyers are not only able to get their foot on the property ladder sooner rather than later, but they can also potentially avoid paying Lenders Mortgage Insurance.”
What is a Guarantor Loan?
So, what is a guarantor loan? A guarantor loan, put simply is where you buy a property without a deposit. You are effectively using the equity from another person’s property, usually from a parent or immediate family member who are over the age of 21 to secure your property purchase.
There are plenty of lenders today that allows family members to go guarantor on a home loan. The equity in their property is used as additional security for the borrower’s loan and this can help borrowers, especially first home buyers, save thousands of dollars on their property purchase.
The primary security for the borrower’s home loan is the property they purchase, but the lender also takes a mortgage over the guarantor’s property. Although this mortgage does not directly support the loan, it is used to help support the guarantor’s financial guarantee.
Today it is becoming increasingly harder particularly for first home buyers to enter the property market, especially in the Sydney and Melbourne property markets where property prices are on average the highest in Australia. Saving a deposit, is almost impossible for many with wage growth not keeping up with property price growth.
However, by using a guarantor, this helps many first home buyers borrow the full purchase price, or even slightly more to cover additional costs such as legal fees, and be in a position to buy their first home sooner.
It is important that you shop around first though when looking for a guarantor loan as there are many lenders to choose from who offer different types of guarantee which can vary from the full loan amount to only 20 per cent of the loan (where the loan is for 100 per cent of the purchase price).
Buying property off the plan is also a great way to ask a family member to go guarantor, due to the long settlement dates available. You buy and lock in at today’s property price, and usually settle a few years down the line, depending on the size of the development. This means that during this time; your property is likely to have gone up in value without you having to start paying off a mortgage. It also gives you time to start saving and you could use these savings towards this property or even property number two.
As your property grows in value it builds up in equity, by which time your guarantor can be released from the loan. It is important to check that the buyer can comfortably make their regular mortgage repayments first to avoid any financial risk in the future.
So why should you use a guarantor on your property purchase? Here are 5 great reasons:
5 reasons why you should use a Guarantor on your property purchase
- No deposit required, meaning you don’t have to spend time saving up the full 10 per cent deposit, which could realistically take you years.
- Allows you to enter the property market sooner.
- Guarantor loans usually attract the best interest rates.
- Don’t usually have to pay Lender’s Mortgage Insurance (LMI) if more than 20% of the property price is secured as a deposit.
- May be able to borrow slightly more from a lender to cover the costs of upfront fees such as legal fees.
Even though a guarantor can help you finance your property purchase, you still need to show your lender that you can afford the home loan on your own, so it is important to remember that you still need to buy a property that sits comfortably within your budget and not push your finances too far as this can put you in financial difficulty. It’s therefore best to speak to a reputable Mortgage Broker who can review your financial situation and advise on the best lenders to use to suit you when looking to use a guarantor on your property purchase.
You also want to create equity in your property as soon as possible, so that you can release your guarantor to reduce the risk on both parties. By purchasing a property off the plan in a high growth area, this can help generate equity quickly.
To find out more about why so many first home buyers as well as other property buyer types are utilising a guarantor with their property purchase and find out how this could help you enter the property market, it’s best to get in touch with iBuyNew where one of our expert Property Consultants can assist you further and we can also recommend reputable Mortgage Brokers to help as well.
Call us on 1300 123 463
to learn more about guarantor loans on your next property purchase.
Published on 19th of September 2016 by Marty Stanowich