Are deposits, genuine savings or lenders mortgage insurance holding you back from buying a property? Do your parents own their own property? Then today is your lucky day.
A Family Guarantee is fairly straightforward and applies to everyone, not just first home buyers. If your immediate family members own a home, they can use the equity in their home to reduce your Loan Value Ratio to less than 80% and help you avoid Lenders Mortgage Insurance. This leaves us with three questions:
Equity is simply the value of the property, less the mortgage. So if a property is worth $500,000 and has a $200,000 mortgage, you have $300,000 equity in the property.
Loan Value Ratio
A Loan Value Ratio is the amount of the loan divided by the value of the property. So if you are buying a $500,000 home and are borrowing $475,000 (because you only have a $25,000 deposit), you have a Loan Value Ratio of 95% ($475,000 / $500,000). Banks generally lend up to 95% Loan Value Ratio.
Lenders Mortgage Insurance
Lenders Mortgage Insurance is a one-off payment you need to make to the bank if your Loan Value Ratio is too high (generally over 80%). This amount can be substantial and is generally added onto your loan. Using the above example, if you borrowed $475,000 to buy a $500,000 property, Lenders Mortgage Insurance would be around $17,500+. Because of this, it can have two effects:
How it works
Using our scenario above, lets examine someone who uses a family guarantee and someone who doesn’t.
Using a Family Guarantee
80% of $500,000 is $400,000. This means you need to put down a deposit of $100,000 and borrow $400,000 to buy the house. You have a $25,000 deposit, which leaves you $75,000 short. The bank will accept your $25,000 deposit and then take a limited second mortgage on your parent’s property for the balance $75,000. So between your savings and your parent’s equity, you have a $100,000 deposit. This keeps your Loan Value Ratio to 80% and avoids Lenders Mortgage Insurance.
Not Using a Family Guarantee
You put down your $25,000 deposit and borrow $475,000. This leaves you with a Loan Value Ratio of 95%, meaning you also have to pay Lenders Mortgage Insurance. In this scenario, Lenders Mortgage Insurance is about $17,500. So you’ll have to borrow $492,500 ($475,000 to fund the rest of the purchase and $17,500 to fund the Lenders Mortgage Insurance). This leaves you with a Loan Value Ratio of 98.50% and will be rejected by the bank.
Where to from here?
As always, there is a little more to it. You also have to consider two things:
Don't let this scare you. You have more options than you think and we’d love to help you. To speak with our of our specialists, please contact us.