Breaking into the property market can be difficult for first home buyers. Victoria’s median property price rose 13.1% in the year to August, according to CoreLogic, which means housing prices may be a bit steep for some young people.
But there is a way to get your foot on the property ladder – ask mum and dad to help. If your parents are willing to go guarantor, they can use the equity in their home as security against your home loan.
That said, guarantor home loans have both pros and cons, and you and your family need to carefully consider all of them before signing on the dotted line.
The pros of guarantor home loans
1. Avoid lender’s mortgage insurance
Most lenders require a 20% deposit on a home loan. If your deposit is less than 20%, you will likely incur a lender’s mortgage insurance (LMI) fee. The security your guarantor offers can reduce your loan-to-value (LVR) ratio to 80% or less so you avoid paying LMI.
2. Buy a home faster
Saving for a deposit can take years. With a guarantor, you can enter the market much sooner. As an added bonus, if you’re buying or building a new home, you can take advantage of Victoria’s First Home Owners Grant.
The cons of guarantor home loans
1. Places your parents at risk
If you default on your mortgage, your parents will be held liable for the portion of the loan they guaranteed. That would expose them to financial risk, and even the chance of the lender seizing their home.
2. Threatens the family relationship
Nothing sours relationships faster than money issues. Should your parents have to bail you out, or lose their home, it could place an enormous strain on the relationship. You may also suffer tremendous guilt.
Do your research and get advice.
That’s why it’s important to weigh up the pros and cons of asking your parents to go guarantor.
If you are financially responsible, have a secure income and have a contingency in place for unforeseen circumstances (like losing your job), your parents might feel more comfortable helping you buy your first home.
Please note this is general advice, not personal advice. To get personal advice related to your specific situation, please consult a finance professional, such as a mortgage broker or financial adviser.
Ready to buy your first home? Property AU can help. Contact us on 1300 771 911 or email sales@propertyau.com.au to discuss your options.
