Security Guarantee : Buying your first home without a deposit
When buying your first home, generally you need a deposit, which might be:
- 5% of the purchase price – which must be saved over a minimum of three months and documented through account statements – mortgage insurance applies.
- 10% – which can be gifted, or saved without providing statements – mortgage insurance applies.
- 20% – which can also be gifted or saved – and avoids mortgage insurance.
There are also other costs, on top of your deposit:
- stamp duty- Which may be waived, as qualifying conditions vary from state to state.
- other minor government legal costs – again which vary from state to state.
- conveyancing costs.
Let’s assume that you can cover these “other” costs but don’t have the required deposit, and that your parents are happy to help but are unable to raise, or provide, a ‘cash’ gift.
Your parents may be able to help by offering one of their properties as additional security. Their incomes are not assessed or needed. Your application still needs to stand based on your income alone.
This is called a SECURITY GUARANTEE.
It is structured as two loans:
- The major loan is for 80% of the total funds required for settlement. This is your main ‘Mortgage’ as it is secured by your house (the purchase property), in your (the purchaser’s) names, alone.
- There is a secondary loan for 20% – this loan is secured by BOTH the purchase property and parental property being offered. You as the purchasers are still the main borrowers- your parents sign the loan as guarantors.
It is a limited guarantee as it only guarantees the smaller loan – Which covers the worst case scenario that the purchasers fail to meet their obligations to repay both loans.
There is a benefit to the purchasers, there is also a risk to the parents providing the guarantee.
The guarantee lasts until the smaller loan is paid off in full (at which point the guarantee and the parents’ property is released)
This might come from literally paying off the loan with the required repayments, or it might also come by (in time) revaluing the purchase property and shifting the smaller loan over to the purchase at a “higher” 80%.
Property values can rise, but equally they can plateau or fall – so it is best to base assumptions around the longer version – “paying it off”
Sometimes, to put some structure in that, we might put the 80% loan over 30 years, and the 20% loan over (say) 10 years.
This is of course all dependent on individual circumstances.
The policy of “security guarantee” is not offered by all lenders, and it is not a black and white “fits all” policy.
It is case by case and is intended for a situation where parents can clearly afford the “worst case” scenario where they become responsible for the guarantee.
Banks will usually require parents (guarantors) to seek and obtain independent legal advice around the worst case scenarios.
For this reason – banks would generally prefer that the security guarantee property is an investment property or a holiday home. They would generally prefer it is not the family home (and will assess the application differently if it is)
Parents will need to live their own financial lives in the coming years which might involve shifting home or selling down assets. If this involves the security guarantee property – you can see why it is important to consider these options before entering such an arrangement.
A security guarantee might be an interesting option for a family to consider. It won’t fit all – but it will definitely suit some.
As always, you can call or email me anytime… Just ask alan.