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It’s usually first-home buyers who are tapping into the bank of mum and dad, but there’s another crowd who are asking their parents to step in, according to a peak mortgage body.
When Jaymee and Tim Goldsmith, both 28, looked to buy a $507,000 home in Melbourne’s Glenroy they had a lump sum of just $25,000 for their deposit and costs.
They soon realised it would cost them close to $20,000 extra as they had less than a 20 per cent deposit, which means their mortgage would incur lender’s mortgage insurance (LMI).
Jaymee and Tim Goldsmith bought their Glenroy home with a 100 per cent lend. Photo: Supplied
But asking their parents to stand guarantor allowed them to achieve a 100 per cent lend from the bank and to use the majority of their savings for stamp duty and other costs. They bought in August 2015.
“We didn’t have to outlay much at all,” she said.
As the housing market continues to grow parental guarantees are becoming more popular with upgradersMelissa Gielnik, MFAA
If they’d intended to avoid LMI by only borrowing 80 per cent of the purchase price they “would have had to save for almost another three or four years,” Ms Goldsmith said.
And it wasn’t their first home either – the couple had already bought an investment property for about $400,000 three years earlier in Moonee Ponds. They had $43,000 in savings for the deposit and costs and had to pay $11,000 of LMI.
“People don’t have 20 per cent when they buy any more, if I’d known about guarantors then I would have asked my parents,” she said.
While first-home buyers are the most common recipients of help from their parents, it has become increasingly common for adult children who already have property to seek assistance, Mortgage and Finance Association of Australia (MFAA) director and managing director of smart lending Melissa Gielnik said
“In the past three years brokers across the MFAA network have witnessed a spike in requests for these types of loans and expect this trend to continue. Parental guarantee loans represent over 15 per cent of loans written for some brokers,” Ms Gielnik said.
“As the housing market continues to grow parental guarantees are becoming more popular with upgraders allowing them to avoid mortgage insurance and therefore borrow a larger amount,” she said.
“The reason for this is we have found many upgraders are not limited by income more by deposit plus stamp duty costs, even when they sell their current home.”
Unless those intending to upgrade had made a significant capital gain, there could still be a struggle to pull together enough to make up the difference.
For instance, a $500,000 property sale could attract $12,500 in advertising and associated fees and for those buying a $650,000 home they would face another $34,000 in stamp duty.
For those tied down to a mortgage, it can certainly be a struggle to save for something bigger on in a more attractive location, Finder spokeswoman Bessie Hassan said.
“While homeowners are enjoying record low interest rates – their term deposits or online savings accounts are being left well behind average home price gains,” Ms Hassan said.
And many lenders are happy to meet the demand for guaranteed mortgages, with 46 per cent of the home loans in the RateCity database allowing them, spokeswoman Sally Tindall said.
“Upgraders are wisening up to ways to avoid LMI and it’s little wonder, given that it can cost tens of thousands of dollars to cover the bank, rather than themselves,” Ms Tindall said.
“The fact that upgraders are reaching out to guarantors is not surprising. In the last few years, wages have stalled at the same time house prices have sky rocketed. Having interest rates so low can also trick people into thinking they can afford to borrow more, even without a decent deposit.”
How does a guarantor work?
– A close acquaintance, usually limited to a family member, offers up a portion of their property as a ‘guarantee’.
– This guarantee, which is an additional mortgage over the family member’s home that they are not charged on, supports the mortgage application.
– If the borrower defaults on their loan, action may be taken against the guarantor’s assets.
– After equity has been built up in the property, a guarantor can be released from the loan.