If you are struggling to save enough money for a deposit but are confident that you could afford mortgage repayments in the future, you may have some alternative options.
Family pledge or guarantor loans
If your parents are current Australian homeowners, they can provide a limited guarantee for your new home. As guarantors, they will use the equity from their own property as additional security for your deposit. However, your property will still serve as the primary security for the loan.
With this strategy, you may be able to purchase a property with little or no deposit. What’s more, you could also save thousands of dollars by not having to pay LMI – And that extra cash could go a long way in creating your dream home.
However, to support the guarantee, lenders will also put a mortgage over the guarantor’s property. This places the property at risk if any repayments fall behind. Therefore, it’s essential for the guarantor to understand the magnitude of this responsibility before they enter the agreement.
Depending on your personal circumstances, you may want to purchase a property in partnership with a friend or family member. Pooling your money and combining your borrowing power will help you get your foot on the property ladder in areas that would otherwise be far out of reach.
However, there are some risks involved. You will be jointly liable for each other’s debts – if one of you defaults on your repayments and the other does not step up to pay the bill, both of your credit ratings will be harmed.
Disputes can also rear their head over:
- Selling the property
- Buying each other out
- Splitting the property’s profits and costs
Therefore, you may want to consider signing a co-ownership agreement and getting some legal advice before buying the property.
Your loved ones may want to help you with your deposit without committing to the risk of a guarantor loan. They can do this by gifting you a certain amount of funds. In this case, your family member must formally declare the sum as a non-refundable gift with the bank.
If your parents are financially secure, they may agree to help you purchase your property with a supplemental loan. This type of loan is particularly attractive to first home buyers, as it tends to have little to no interest – Thanks, Mum and Dad!
To avoid any controversy down the line, we strongly recommend that the terms between both parties are documented clearly and accurately.