A parent* is able to help their children avoid the cost of lenders’ mortgage insurance by offering a portion of their home equity to reduce the risk for the lender. The standard comfort zone is where your loan does not exceed 80% of the property value so your deposit is combined with equity in the parent’s home or investment property (preferrable) as follows:
For example, let’s say you were a first home buyer looking to buy for $500k and you had $50k saved.
To buy for $500k in Vic, including an estimate of costs inclusive of current stamp duty reductions, you would need $516k approx.
$516k less your $50k deposit would mean you’d need a loan of $466k, which would be 93.2% of the propert value. In this instance, mortgage insurance of approximately $15k would usually be payable and a higher interest rate would be charged on your home loan due to the elevated risk.
If a parental guarantee were to be available, you would take 2 loans:
- You would borrow 80% of $500k which is a loan of $400k, this loan is secured by your new home.
- $516k is required, less your $50k deposit = $466k required
- The $66k shortfall is secured by Mum and Dad’s home, providing the loan does not put them under potential hardship and there is sufficient equity that this loan is less than 80% of the value of their home
The result is, you are able to borrow $400k + $66k, but keep the lending to no more than 80% of property values, avoiding lenders’ mortgage insurance and most likely securing a much better interest rate because the risk to the lender is reduced.
*Mum and Dad must seek independent legal advice to have their rights and responsibilities as guarantors explained to them fully. Even though some guarantees can be limited / restricted to only the small loan portion being guaranteed, they are liable for that amount in the event of a default so these arrangements should not be entered into lightly. Legal advice is a must.