Many people are surprised to hear me say I think now can be a very accessible time for first home buyers to purchase a property. While it’s of course true that house prices – particularly in Sydney and Melbourne – are at a record high, interests rates are also at record lows.
Servicing the interest on a home loan can be more affordable than many would-be home buyers might assume and it’s starting to become competitive with paying rent. The biggest hurdle for most people to get into their first home is saving for a deposit.
The majority of lenders require a borrower to have at least 3% to 5% of the property value in savings in order to qualify for a loan but then require Lenders Mortgage Insurance (LMI), which can add tens of thousands of dollars in fees to the loan. For example if you were to buy an established home (i.e not new off the plan) worth $500,000 in NSW and had $50,000 saved you would end with a ~$485,000 loan and an LMI bill of around $16,000 – that’s over 3% of the value of the property you’re buying. Even with $100,000 saved you’d still shell out around $5,000 in LMI fees, or 1% of the value of the property
Saving even $100,000 can be a big ask for a lot of buyers so it’s no surprise that over half of all first home buyers are now getting help from their parents to purchase property. This help can either come in the form of a gift, a loan, or from a family guarantee.
Family Guarantees – The Main Points
- Rather than you saving for all the deposit, your family can offer a family guarantee – and you can use it for either part of the deposit, or all of it
- A family guarantee works by a family member using their own home’s equity to form all or part of your deposit – which can help you avoid LMI and, in some cases, make home buying possible
- Once you’ve reduced the loan amount that is secured by the guarantee, you can release it – meaning your family member doesn’t need to be liable indefinitely
- If the property appreciates then this can also unlock the guarantee, it’s all about getting the loan amount to property ratio (LVR) to be under 80%
- Some lenders will let you guarantee and borrow more than the value of the property if you are using the additional funds to payout other loans as part of this purchase.
What is the risk for family members who provide the guarantee?
Most banks and some non-bank lenders offer family guarantee loans. The risk to the guaranteeing family member is relatively low – a lot would have to go wrong in order for them to be affected. For that to happen, you would need to default on your loan, and then when your lender sold your property to recover the cost of the loan, it would need to sell for less than the total value of your loan at that point in time and you and/or your parents would have to be in a position where you have no other way to pay the difference.
Things to keep in mind
- As the borrower, you’ll pay interest on the full amount – so the difference in interest might cost you more than the LMI you’ll save
- It might be smarter for you to receive a loan from your family member. Even if that loan from your family member comes with some interest, it might be a more cost-effective way for you to fund the property if it’s less than your lender’s interest rate. For help calculating both scenarios, you can talk to a uno home loans expert through live chat or by calling 133 866.
- The person providing the guarantee tends to be limited to family members
Family guarantees aren’t always the optimal pathway to financing a home. Nor are they a perfect socio-economic solution to the affordability challenges facing first home buyers. They require a family member who has equity in an existing property, and for that reason there is evidence to suggest they have contributed to the increase in wealth inequality. But with family contributions to property purchases rising and family guarantees becoming more popular, it’s important to examine the advantages, pitfalls and alternatives with full information and transparency.
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Each month, uno’s CEO Vincent Turner joins Luka Bona and Peter Esho on 2UE’s Talking Property on the Monday before the RBA’s interest rate announcement. Listen to the podcast here.