Helping your child gain a foothold on the property ladder
Saving for a deposit is more challenging now than ever before. The costs of living such as rent are very high, making it tough to squirrel away enough to cover even the minimum deposit a lender requires.
Subject to all the normal checks and measures, a first home buyer may only need to put down a 5% deposit plus a small amount extra for legal costs and council rates but they will be expected to have a considerable amount more to pay the lenders mortgage insurance, explained in more detail here.
In some cases the mortgage insurance premium is enormous, cancelling out a large portion of the current stamp duty concessions available in Melbourne and Victoria.
Mortgage Insurance reduces on a sliding scale, the more cash contributed upfront, the lower the premium. An alternative to gifting a sum of money to your child to help bolster their deposit is offering a family guarantee. This is where you offer a portion of your home equity to provide the lender a bigger security blanket than just the savings your child has accrued. The lender sees equity as the same as cash but you as the guarantor don’t have to part with your savings or take a loan out, your assistance doesn’t need to be in the form of liquid money.
The lender does not need to charge mortgage insurance if the loan is 80% or less than the property value. Let’s say your child is looking to purchase a property in Melbourne for $600k. They’ll pay no stamp duty but they will need $6k approx to cover the incidentals. Were they to contribute the minimum, which I calculate to be $61k approx, the mortgage insurance premium, included in the $61k, would be $20k approx!
Let’s look at the same transaction with a family guarantee. $600k is the purchase price and $6k would be the costs meaning $606k is required all up. The amount your child has saved is $61k meaning the loan required is $545k which would be split into two parts, one part being $480k, being 80% of the purchase property value, and the other part, the remaining $65k, secured against the guarantor property. Mortgage Broker Melbourne will complete a private assessment of the guarantor financial situation to make sure providing the guarantee does not place the guarantor at risk in any way financially.
There would be no need to charge lender’s mortgage insurance. Ideally this equity is in an investment property but the family home can be used also.
Mortgage Broker Melbourne would diarise to look into releasing the guarantee as soon as possible, to free up the guarantor’s equity once more. The property that was purchased needs to have gone up in value enough for the loan outstanding to be at that 80% threshold. Alternatively, the guarantor may wish to be released before then and is welcome to contact to discuss. This scenario would simply involve the child now paying mortgage insurance on the loan amount outstanding calculated on the property value at the time. Hopefully this would still have gone up significantly so as to reduce the premium to well below what they would have paid if they had no assistance at the start.
Initially the guarantor should make contact with a solicitor to have the guarantee they are providing explained in broad terms. Pre-approval is sought initially which may involve a valuation of the guarantor property. Once a purchase is made, and the loan becomes unconditionally approved, the lender sends a formal loan offer to the child which your Mortgage Broker Melbourne broker meets with them to sign. A separate pack of documents is sent to the guarantor, to go through in person with your chosen legal representative who will explain your rights, obligations and responsibilities as guarantors.
Marc has been a professional lender for 28 years. After beginning his career in 1990 with a UK Building Society, he moved to Australia where he held several different retail banking roles. In 1999 it became clear to him that a mortgage broker would eventually become an obvious choice for someone looking for a home loan so he took the plunge and became an independent broker. He hasn’t looked back since!