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A low-deposit solution to getting a foot on the property ladder

A low-deposit solution to getting a foot on the property ladder
April 30, 2018 Propertyology

It’s often said that the hardest part of building a sustainable property portfolio is accumulating a deposit for that first property. Here’s a lateral-thinking option that just might enable you to get your money working harder real soon.

Experienced mortgage broker, David Hoar of Home Loans Newcastle, says there’s a large number of wannabe property buyers who are unaware of the Family Equity option and how it can help them get on to the property ladder sooner, save money, and get their money working harder.

“Saving a big enough deposit to buy that first property is often a very long process, especially for younger people who may have spent time travelling, studying, paying for a wedding, or ‘finding’ themselves,” said Mr Hoar.

The old-fashioned way to buying property involved saving a 20 per cent deposit and acquiring a home loan for the rest. To accelerate the process, it’s become increasingly more common for property buyers to purchase with a smaller deposit while satisfying lender’s security requirements by paying a one-off insurance premium known as Lenders Mortgage Insurance (LMI).

What is a Family Equity Loan?

A family equity loan essentially means, in lieu of a property buyer satisfying a lender’s standard 20 per cent equity requirement, a third party (usually a family member) assists the buyer by providing a security guarantee.

Can I buy an investment property without a deposit?

If your first property is an investment, some lenders will allow you to use a Family Security Guarantee to help you buy with a small or no deposit.

How does it work?

When you buy your investment property the lender takes a mortgage over your property and a limited mortgage (guarantee) over a family members property.

How much can I borrow?

You can normally borrow 100 per cent of the property’s value plus costs such as stamp duty, pest and build and conveyancing costs. Some lenders may also let you consolidate other debts.

Who can provide the limited guarantee?

While most guarantees are from one of the borrower’s parents, some lenders allow guarantees from immediate family (ie. spouses, grandparents, siblings and adult partners).

How long does the guarantee stay in place for?

Once the property owner’s equity increases to 20 per cent (by paying the loan down and/or the property increasing in value), the primary borrower/s can apply to the lender to have the guarantee removed. The lender will obviously arrange a valuation of your property.

Can you buy multiple investment properties using a family security guarantee?

In most cases, no! The purpose of these arrangements is to help someone in to the first property, not to build a property empire.

What if my guarantor already has a mortgage?

As long as they have sufficient equity in their property, some lenders will take a second mortgage on the family member’s property.

What are the risks for the family member providing the guarantee?

If the borrower defaults and the situation becomes serious enough, the lender could sell the borrower’s property and then pursue the guarantor for any money still owing. Lenders will insist that guarantors get legal advice prior to signing any loan documentation.

Which lenders allow family security guarantees?

Not all lenders allow them, so talk to your broker about what lenders can help you and what their requirements are.

How much does LMI cost?

Without either a 20 per cent deposit or a Family Equity strategy, the loan application will be assessed by a mortgage insurer and the borrower will be liable for the one-off insurance premium.

If buying a property for $400,000 with a 10 per cent deposit ($40,000), LMI is around $6,500-$7,500. If buying a property for $400,000 with a 5 per cent deposit ($20,000), LMI is around $12,000-$13,000.

“A Family Equity (security guarantee) can be a great way to get into the property market earlier,” said Mr Hoar. “We’ve enjoyed helping plenty of people from all over Australia to implement this strategy.”

David Hoar is an Authorised Credit Representative of Australian Finance Group, one of Australia’s leading financial services companies. He is a qualified Accountant, has a Graduate Diploma in Taxation, a Graduate Diploma in Business Studies (Marketing), a CPA Certificate in Financial Planning, a Real Estate Certificate and a Certificate IV in Mortgage Broking.

David helps property owners to leverage their equity to save on interest and to increase their wealth, and First Home Buyers to ensure they have the right loan in place for their current and future requirements. Through a structured approach David regularly helps clients save thousands of dollars every year on their current repayments. Here’s how you can contact David directly via email.

DISCLAIMER: This blog is provided for general information only. Please do not rely on it as a substitute for specific legal or financial advice. Before making any decisions, you should consider your specific objectives, financial situation and needs.