In most cases, banks consider home loan applications with 5-10% genuine savings. So, to buy a house in this day and age, just like the Beetles song, sometimes you just need a little help from your friends… (read that as family, usually parents).
Gifted Deposit
If you are lucky enough to have a parent/parents or other immediate family member who is willing to gift you the deposit, you can generally borrow up to 95%.
Jokingly referred to as ‘The Bank of Mum and Dad’, most banks require a letter as a legal statement detailing that the funds have been handed over unconditionally without the expectation of repayment (as a gift, not a loan to be repaid). In addition to the gifted deposit, banks still like to see that borrowers have the financial discipline to manage home loan repayments, through evidenced savings or a rental payment history. In situations where parents or immediate family members may not have the funds available for a deposit, there are alternative ways to receive support.
Guarantors
What exactly does it mean to have a guarantor for your home loan?
Imagine you’re trying to get into a party, and you need someone to vouch for you at the door. That’s essentially what a guarantor does for your home loan application. They’re someone (usually a family member) who uses their own property as security for your home loan application.
Acting as a guarantor isn’t just a gesture of goodwill; it’s a serious commitment. If you default on your loan repayments, your guarantor could be on the hook for the remaining balance. So, they need to assess their own financial situation carefully and ensure they are comfortable taking on this responsibility. Being a guarantor could impact their own borrowing capacity for future loans or credit.
From a borrower’s perspective, having a guarantor can open doors that might otherwise be closed. If your income or credit history isn’t strong enough to qualify for a home loan on your own, a guarantor can bolster your application and you may be able to purchase a property with a smaller deposit or even no deposit at all.
Having a guarantor for your home loan can be a lifeline for borrowers who need a little extra support to make their homeownership dreams a reality. Having a guarantor can help you avoid the cost of Lenders Mortgage Insurance, resulting in potential savings of thousands of dollars in upfront expenses.
When the situation changes, for example, you have built up enough equity, you can remove a guarantor. In some cases, removing a guarantor may involve refinancing your home loan. This means replacing your existing loan with a new one, typically with more favourable terms and conditions. Refinancing allows you to renegotiate the terms of your loan and remove the guarantor from the equation entirely.
Gifted Deposit or Guarantor Loan?
A gifted deposit and guarantor home loan serve two different purposes. One, being the gifted deposit, will directly reduce the final loan amount. The other, using a guarantor, allows you to increase borrowing capacity up to the full purchase price of the property.
Choosing between the two depends on the availability of funds, your financial position and your ability to service a mortgage.
If you want to discuss your situation reach out to see how we can help.
