Here’s a sobering thought:
In October 2015, the Housing Industry Association released a report that found it’s almost impossible to buy a home in Sydney on your own. In fact, the average Sydney mortgage needs 1.74 average adult wages in order to service the cost of a median-priced home in Sydney.
Which, by the way, is now over $1 million.
On top of that, potential first homeowners in NSW copped another hit this last January. The NSW first homeowners grant was slashed from $15,000 down to $10,000.
If you’ve got adult kids at home who are looking to enter the property market, you probably find the above disheartening.
But it’s not impossible to help your kids buy a home in Sydney. Helping your kids out financially isn’t an overnight decision. But with careful boundaries, planning and an exit strategy should the whole thing go belly up, you’ll be better placed to come out the other side on the right foot.
How to help your kids buy a house in Sydney
It’s pretty hard for first homebuyers to save up that 25% deposit they need to get a home loan. Without that deposit, they end up paying through the nose with Lender’s Mortgage Insurance (LMI). LMI increases exponentially the smaller a deposit is.
So what are your family’s options?
Option 1: The bank of mum and dad
Gen Y is often blasted by the older generations for being spoilt and having everything handed to them on a silver platter. But this attitude seems to disappear when it comes to buying a home.
That’s why many parents choose to gift their adult kids a lump sum to go towards their mortgage deposit. This means the kids end up with a smaller loan. You will need to sign a Statutory Declaration stating that the gift is not repayable.
But even if you go down this route, your kids MAY still need to show that they have genuine savings. This means they’ll need to have their deposit in their bank account for at least 3 months.
Option 2: Go guarantor without going bankrupt
If gifting your kids – or any other borrower, like a grandchild, friend, niece or nephew – tens of thousands isn’t an option, your next best bet is going guarantor on a home loan. This means that instead of giving the borrower the money to go towards their mortgage deposit, you put your home up as security. This takes LMI out of the picture, and allows first homebuyers to buy a home in Sydney. And you don’t even have to provide your proof of income to the banks. Easy.
Guarantor loans are great when there is no deposit but lots of affordability as the loan will be bigger. It gives the banks reassurance that the loan will be serviced and reduces risk. If you go guarantor on someone else’s home loan, they actually don’t have to have any deposit at all and can borrow the full purchase price, plus the purchase costs like stamp duty and conveyancer fees.
You don’t actually guarantee the whole home loan. Just the part needed to avoid LMI which is usually 20-25% of the purchase price. This is called a limited guarantee.
Ideally, you should own the property outright, but you can still go guarantor if you yourself are still paying off your own mortgage. Investment properties are even better.
But going guarantor is a big responsibility.
Risks involved when going guarantor on a home loan
Liability
If the worst should happen and the borrower defaults on the mortgage repayment, the bank may ask you for the amount of the limited guarantee if they cannot recover their money.
If you’re unable to cover this, it could show up on your credit report as a default.
Credit problems
It’s not your loan, but that’s not the way the banks see it. If you try to apply for another home loan, the banks take into account the fact that you’ve used equity as a guarantor.
Could ruin relationships
What would happen if the borrower defaulted on their mortgage? How would you feel towards them? How would they feel towards you? Is your relationship strong enough to outlast a financial spat? These are all big questions you need to answer before you sign on the dotted line.
Wrong lender
Going to the wrong home loan lender can lead to a bad experience – having to prove income and much more strenuous conditions and hoops to jump there. There is a big difference to how the various lenders approach guarantors.
The remedy? Plan for the worst
You trust the borrow explicitly – they’re a family friend, your grandchild, your own child, or a dear niece or nephew. You know they have the best intentions…but what happens if they get sick and can’t work, and then can’t afford their mortgage repayments?
Plan for the worst case scenario now: no matter how much you trust the borrower to meet repayments on time; there are some circumstances which we can’t always control, such as illness or loss of job, which can affect the borrower’s ability to afford the loan repayments. Insurance can be a key help here.
So, before agreeing to be a guarantor for a home loan, take time to research whether you would actually be able to afford the repayments if you had to step up. And even more than that, going guarantor is a big emotional decision – do you think your relationship can stand the test? A mortgage broker can help you with the finance part, but these tough personal questions need time and attention.
Ready to go guarantor on a mortgage? Get in touch! I’ll help you find the right lender!