Your First Home May Not Be That Far Out of Reach.
If you are like most young Australians who have entered the workforce and are now starting to fend for yourself then you have probably had more than one conversation with your friends, work colleagues or family about buying your own home. For most Australians owning property is not only a sign of your growing independence but it is also seen as a way where the average person can make sums of money that reach beyond any amount they would be able to save by simply working their day job.
The issue of late, however, is that so many first home buyers see the idea of owning a home as too far out of their reach and therefore don’t spend any time understanding how the process of achieving your first home can work. This can mean that you may be eligible right now and simply don’t know.
In many instances, potential homeowners who are comfortable paying the rent each week can afford the repayments on their home but cannot achieve the required deposit without completely compromising their quality of life. One way around this is with the use of a family guarantor. This is where a family member guarantees a percentage of the loan on your behalf. It is often believed that if a family member offers a guarantee that they will become liable for the entire loan if the borrower fails to pay, but this is not true. The guarantee is usually what is called a “limited guarantee” and as such, the amount the guarantor is required to cover is limited to the amount they agree to. For example, if we use a purchase price of $450,000, and a family member offers a guarantee of 20% of the purchase price then a few things happen,
1) The guarantor is only exposed to $90,000 of the total loan (20% of $450,000)
2) The borrower is now under the 80% limit for Loan Mortgage Insurance (LMI) which means they are saving thousands of dollars that they would otherwise have to pay to protect the bank.
So, what does this look like from an actual numbers point of view? To achieve this, we would typically see two loans established;
Loan 1 – $360,000 (80% of $450,000) – Secured by the Purchased Property
Loan 2 – $90,000 (20% of $450,000) – Secured by either equity in an existing home or cash from the Guarantor.
Loan 1 Loan 2
$360,000 @ 3.99% $90,000 @ 3.99%
Interest Only Principle and Interest
$276 p/w $153 p/w
Total Repayments = $429 p/w
With the benefit of the First Home Owners Grant on offer until June 2017 you can further reduce the repayments as well as the guarantor’s exposure by applying the $20,000 as a deposit and reducing the guarantors limit to $70,000. This would bring the total repayments down to $395 p/w (based on the same terms and rates). In many cases, this is cheaper than renting a property of similar value.
When it comes to releasing the guarantor from their obligations this can be done in two ways;
- Loan 2 is paid in full and therefore the guarantee is released. Loan 1 is then converted to Principle and Interest payments from its Interest Only status. Allowing your to pay off the rest of your loan over time.
- The combination of the reducing balance of Loan 2 and the increase in the property’s value allows for Loan 2 to be paid out and the balance of Loan 1 is increased. If the 80% Loan to Value ratio (LVR) is exceeded and LMI will be incurred most buyers or happy to pay a little LMI to allow the guarantor to be released.
For those buyers looking to get into the market, you can still go direct to the bank with less than 20% deposit. In most cases, major lenders will lend up to 95% of the property’s value (including LMI). This means that you will need at least 5% deposit (which can come from the Frist Home Buyers Grant) + costs (approx. $1112 in Qld for a FHB on $450k) + LMI. This essentially means you may only need around $10k in genuine savings to purchase a new $450,000 home.
It should be said that we recommend that you try to avoid LMI where possible, but it is also important to weigh up the historically low rates on offer by the banks, the increasing cost to build, and the $20,000 incentive and decide whether paying LMI might be a cost you are prepared to pay to get into the market whilst the “stars are aligned” for First Home Buyers. Keep in mind that come June 2017 you may find that the $20,000 currently on offer from the government will need to come from your pocket. For a lot of people that will make saving for a property almost impossible.
In the past few months, Gold Property Partners have been able to assist several First Home Buyers in realising their dream of buying their first home. We work with each client to understand their needs, budget, location and what they are wanting in a home. We help to source a block of land when required and present plans from a panel of well-known builders that are suited to your needs. We assist with inclusions, custom changes, and colour selections to finally present you with a fixed price contract that gives you confidence there are no hidden surprises during the build. The best part of all of this is that we do not charge you a cent throughout the entire process. As we are paid our commission from the builder for introducing their product to you we pass on all our experience and any savings directly to you.
If you want to know more about what we do then please reach out and contact us for an obligation free chat on 07 54389775 or email [email protected]ers.com.au. Remember to like the page for regular updates.