First home buyers may be aware that the Government’s First Home Deposit Scheme was launched Jan 1 to help people who have less than 20% deposit (and as little as 5%) to get their first home. One of the main advantages of this Scheme is that the Government will wear the cost of the Lenders Mortgage Insurance*(LMI) which can be quite significant. However, there are only 10,000 available nationally – 3000 have already been lodged, and a further 7000 will not be available until February 1 in a staggered release of the Scheme so there is very high demand for the program.
However, there are other ways to avoid the cost of LMI, one of which is to secure a Guarantor who can guarantee the portion of the loan that puts you over the 80% loan to value ratio (LVR). For example, if you want to buy a property worth $400,000 and only have $20,000 deposit (5%), a guarantor can use the equity in their property as security for the remaining 15% or $60,000 and the money required to settle. This way the guarantor is only exposed to a limited loan amount, not the entire loan for the whole purchase.
When you, the borrower, has repaid the $60,000 into the loan or your property has risen in value and you meet the 80% LVR, the guarantor and their security can be removed from the loan. In a rising property market, this can be a great option to help you get into the market sooner. You will still be eligible for any First Home Buyers Grants* or Stamp Duty Exemptions* if you have never owned property before. NB
*Please check all conditions on line
However, there are other ways to avoid the cost of LMI, one of which is to secure a Guarantor who can guarantee the portion of the loan that puts you over the 80% loan to value ratio (LVR). For example, if you want to buy a property worth $400,000 and only have $20,000 deposit (5%), a guarantor can use the equity in their property as security for the remaining 15% or $60,000 and the money required to settle. This way the guarantor is only exposed to a limited loan amount, not the entire loan for the whole purchase.
When you, the borrower, has repaid the $60,000 into the loan or your property has risen in value and you meet the 80% LVR, the guarantor and their security can be removed from the loan. In a rising property market, this can be a great option to help you get into the market sooner. You will still be eligible for any First Home Buyers Grants* or Stamp Duty Exemptions* if you have never owned property before. NB
*Please check all conditions on line
In the past, the guarantee was often for the whole loan and was fraught with danger if things went wrong and there have been cases where guarantors have lost their homes. This is why banks prefer guarantors to offer a holiday home rather than their home as security. Even so, the partial guarantee option is not for everyone and does come with some risks, most of which can be mitigated with the right advice and management:
- The guarantor’s equity essentially acts as collateral should something go wrong with the borrower’s ability to make repayments so it is a serious consideration for the guarantor. It is not something to enter into lightly, especially if the guarantors are elderly.
- The property used for collateral generally need not be unencumbered, but it is usually preferred.
- Borrowers still need to meet all responsible lending criteria and ability to service the loan.
- Borrowers should have adequate income protection insurance, life insurance or a mortgage protection plan so that in the event of an unexpected life event occurring the risk for the guarantor is significantly reduced.
- When the time comes to be removed from the loan, the guarantor need not pay the fee. There is a small cost involved, but it should be paid by the borrower.
This option is not available with all lenders and each lender can have different requirements for what makes someone eligible to be a guarantor so please speak to us about your circumstances so we can ascertain what will work for you. We are always happy to meet with the prospective borrower/s and guarantor/s to help you understand fully how this scenario works for all parties. This is just an example of one option available to First Home Buyers.
If you would like to discuss your situation, please do not hesitate to contact me on 0412 709 200 or book a time to chat via calendly.com/louise
With thanks,
