With some first home buyers finding it difficult to enter the property market, some parents are looking for ways to help out their kids. But what is the best way to help financially?
Do you ‘gift’ the funds in the form of cash or provide a security guarantee? There are some factors to consider with each of these that may affect your loan application.
This is when a family member provides the borrower with a one-off cash payment which the borrower can put towards their home loan deposit. Although it is considered the most straight forward option, every lender has their own terms and conditions, so you should make yourself aware of these before handing over your money.
Gifts can either be repayable or non-repayable. If the giftor expects the gift to be repaid over a period of time, the borrower will need to include this as a liability and factor it in as a financial commitment.
Most of the time though it is a non-repayable gift. Lenders usually ask that the person giving the money a sign a statutory declaration stating it is not a loan and not repayable. The gifter usually provides proof that the money is available to give away and this is usually done by providing bank statements.
When applying for a home loan, the lender needs to see that the borrower has saved at least 5% of the purchase price. This is referred to as Genuine Savings. The evidence needed is 3 months savings statements showing the savings building up to at least the 5% minimum.
So, if your child has not saved 5% of the purchase price the lender will want to reduce their risk by getting a larger gift. To avoid the Genuine Savings requirement the gift and the amount they have saved will need to be more than 15% of the purchase price plus costs in order for them to qualify for a loan.
An advantage about using a gift is your child may be able to avoid having to pay Lender’s Mortgage Insurance (LMI) if the loan amount is under 80% of the value of the property. LMI is a can add to thousands of dollars and is usually added to the loan amount. If the gift helps avoid this this then it is an extra benefit for the borrower.
Being a guarantor means you can help your child purchase a property without having to use cash. Instead you allow your child to use the equity saved on your own property as additional security for the home loan. The lender then secures the home loan over the two properties.
This can mean that the deposit required by the child is dramatically reduced. Some lenders will allow the child to borrow up to 100% of the purchase price and some will even increase this to cover the costs like stamp duty. This could enable the child to get a foothold into the property market years before they could have if they had done it on their own.
The second big advantage of using a guarantor is that it allows the borrower to avoid mortgage insurance. By reducing the lending ratio to below 80% by using both properties as security, then no mortgage insurance is levied. This can be a substantial saving and all without the parent having to part with any cold hard cash.
There are actually no direct financial rewards for being a guarantor, but there are risks involved. Signing on to be a guarantor is as big of a commitment and should not be done lightly and without seeking legal and financial advice. The main risk occurs if your child is unable to meet the repayments. This can happen due to a loss in employment, sickness or accident. Since you have offered your property as additional securityif it all turns sour the property can be sold to repay the debt. In this circumstance you would most likely help out with the repayments to ensure that the loan repayments are made.
Providing a guarantee can also place further restrictions on the guarantor. It could make it difficult if you decide to sell the property. The guarantee amount will also appear on your credit report and need to be factored in as a commitment if you applied for another loan or credit card. These two aspects might make being a guarantor too restrictive and due to this and the risks involved, many parents will choose a gift to help their children.
If you are interested in finding out more about gifts and guarantees our Lending Specialists can help go through your options. Regardless of whether you are the parent looking to help out, or if you are a first home buyer considering talking to your parents about assisting you, give our Lending Specialists a call on 13 72 62, or leave your details here and they can contact you.