A no deposit alternative to a guarantor loan
If you’re struggling to save a deposit but want to avoid some of the risks of your parents acting as a guarantor on your mortgage, there is an alternative.
With a parent assist home loan, you can get into the property market sooner and still borrow up to 100% of the purchase price plus costs.
Your parents can also make a return on investment so it’s really a no deposit wealth creation solution. How do you qualify?
How much can you borrow?
A parent assist mortgage is a relatively new no deposit home loan solution and it’s only offered through a specialist lender.
You’ll have to meet certain requirements but if you do, you’ll generally be eligible for the following:
- Depending on what your parents are willing to lend to you, you can borrow up to 100% of the purchase price plus the costs of completing the purchase.
- No genuine savings required.
- You can also avoid Lenders Mortgage Insurance (LMI) if you can reduce your Loan to Value Ratio (LVR) to 80%.
- Loan term for the family loan: Up to 25 years or you can pay it back early with no fees or break costs applied.
- Mortgage loan term: Standard 25 to 30-year terms available
- Interest rate: You’ll pay a slightly higher interest rate with a specialist lender as well as a margin for the interest rate on the loan from your parents.
Discover if you qualify for a parent assist home loan!
Call 1300 889 743 or fill in our free assessment form to speak with one of our experienced mortgage brokers.
How does it work?
A parent assist mortgage is very similar to receiving a gifted deposit. The difference is that you’ll pay back this gift to your parents with interest.
To break it down, you find a property as normal and work out how much you need for a deposit, which is generally 5-10% of the purchase price including the costs of completing the purchase.
Your parents can even provide a 20% deposit plus costs so you can avoid LMI. It’s totally up to them.
Your parents will come up with the funds for the deposit as either cash or equity in their own home and the lender will hold this loan as the third-party.
You and parents will determine the rate of interest on the loan but, as a minimum, the lender will require a rate of CPI (the Consumer Price Index) +0.5%. From that rate, the lender will take 0.75% for investment management purposes.
Once this is finalised between you, your parents and the lender, you’ll simply need to meet standard borrowing requirements regarding your financial position, character and credit history.
How do I qualify?
You and your parents will be required to get independent legal and financial advice.
At the end of that process, you’ll need to provide a signed agreement between you and your parents specifying the loan conditions and repayment schedule.
Please speak to one of our mortgage brokers about this. We can provide you with a template that will be accepted by the lender.
How is the loan secured?
The loan itself will be secured by a second mortgage or caveat behind your home loan. Bear in mind that while the lender will consent to a second mortgage, they won’t consent to the conditions on a caveat.
It’s not the same as a shared equity loan!
Your parents don’t take a share of ownership in your property even with the second mortgage. All rights and responsibilities associated with the property are yours.
The good news is that your parents won’t require a credit check when securing their loan with a second mortgage.
Be careful of your borrowing power!
Not only will you be assessed on your ability to afford your home loan but the lender will take into account your repayments on your parents’ loan.
If you have a stable job, minimal debt and you’re earning enough to afford the home loan plus your repayments on your parent’s loan, you should be approved.
We can help you to put your application together so you get approved the first time. Please call us on 1300 889 743 or complete our free assessment form today.
Do you have a legal agreement in place?
The letter detailing the arrangement between you and your parents should be overseen by a solicitor.
Although it’s not something any of us would like to think about, family disputes can happen so it’s important to have a clear record of the agreement and conditions of the parent assist home loan.
Pay off your parents’ loan fast
Most people pay back the loan once they’ve built up enough equity in their property..
Do right by your parents and avoid spending excessively or going on holidays..
Your goal should be to pay back your parents as soon as possible..
What are the benefits of a parent assist home loan?
Benefits for you
- You don’t need a deposit or genuine savings.
- Debt consolidation is available.
- You can buy an owner occupied or investment property.
- You can use the loan for construction purposes.
Benefits for your Mum and Dad
- Your Mum and Dad are investing in your future and they get a return on investment as well.
- They set the loan amount and interest rate (above the minimum lender requirement).
- If they don’t have cash for your deposit, they can use the equity in their home.
- Your parents don’t need to provide a guarantee which is different to a guarantor home loan.
- Unlike gifting a deposit, your parents earn interest on the amount you pay back and receive statements from the lender that tell them whether you’re repayments are on time.
- They have a legal right to access the money at all times.
- In the event that you run into financial difficulty and cannot meet your mortgage repayments, your parents’ property and credit file are protected.
Can I still apply for FHOG?
Yes! If this is your first purchase and you’re buying a newly-built property, you can apply for the First Home Owners Grant (FHOG) or your state’s equivalent.
This could be up to $15,000 depending on your state.
In this way, you can pay your parents back sooner.
Insights into first home buyers
The second biggest challenge facing first home buyers (FHBs) trying to crack the property market is saving a deposit, which rose from 20% to 24% in just a 6-month period.
That’s according to the Genworth Homebuyer Confidence Index (March 2016) report, which found that the number one challenge was high property prices.
Since 2009, the proportion of FHBs who used savings as part of their deposit has decreased by 39% (from 72% in 2009 to 44% in 2016).
During the same period, the proportion of FHBs who used sources other than savings as part of their deposit increased by 43% (from 46% in 2009 to 66% in 2016).
Gifted deposits, guarantor loan and parent assist home loans are the best no deposit solutions on the market and more and more young Australians are looking to these alternatives to buy a home.
We’re experts in parent assist home loans
Speak with one of our experienced mortgage brokers by calling 1300 889 743 or by filling our free assessment form today.