With house prices on the rise and saving a deposit becoming even more difficult for first home buyers, many are turning to their families for help getting into the property market.
The main options to help family get into the property market are:
Guarantor home loans: There are different types of guarantor home loans but the usual type is where family members offer property as security for the loan when there is insufficient deposit.
Gifted deposits: This is basically where the family member will give money as a gift to be used as the home loan deposit.
Soft loans: This is similar to a gifted deposit but the money is returned to the family member when possible.
When the parents or family member has equity in their home or another asset this can be used without raising the cash.
The guarantor only provides security for the loan so all of the payments are made on the loan by the borrower (if all goes to plan). This is good for the guarantor as they can use their cash for other things.
If the borrower does not make their payments then the guarantor’s home or other asset that is used as the security is at risk.
With a gifted deposit the family member is not responsible for the loan and you are not putting their home at risk if everything goes wrong.
If the guarantor has equity in their home and doesn’t have cash on hand, they could take out a line of credit against their home and give it for the deposit. That way even though the family member will be responsible for the line of credit, that is all the family member will be responsible for.
The family member needs cash on hand or if a line of credit secured by an asset (property) is used, the family member will be expected to make the payments on the line of credit.
The same as the pros for a gifted deposit. The family member has no responsibility for the home and their home is not put at risk.
Provided everything goes to plan, the family member should get their money back—eventually.
Lenders generally do not like this situation and where they know it is occurring it could mean they reject the loan application.
Because it is a soft loan the family member will generally be a lower priority (with the lender coming first) for making repayments.
It is very important for the family member to understand what their responsibilities and their risks are if things don’t go to plan. What will happen if the borrower fails to make the repayments?
The family member may also want to obtain independent financial advice before they commit.
Are you interested to assist your family to buy a property?
Contact a mortgage broker to learn more.
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