A Mortgage That's All In The Family
Sydney Morning Herald
Wednesday April 7, 2004
The strategy To get my parents to help buy my first home.
Will they do that? It's up to your parents, but a recent Newspoll survey for the Commonwealth Bank found almost 90 per cent of parents would help their children purchase a home if they could. Most commonly, parents help out by pitching in with part of the home deposit to help their children get into the market sooner. This is quick, clean and simple. Your parents can simply draw on their savings - or borrow against their own home - to give you part of the deposit as a gift.
What other options are there? Both St George and Commonwealth banks have recently released financing options targeted at immediate family members who want to help, but who may not have cash on hand to contribute. St George's Family Pledge option allows immediate family members to "top up" your loan so that you can borrow the full price of the property, plus costs like legals and stamp duty, without the need for mortgage insurance.
How do they do that? They have to guarantee a portion of your loan and secure that guarantee with a mortgage over their own property. Your parents might, for example, agree for a further $60,000 mortgage over their own home (which, with St George, might mean they have to refinance) to top up the "equity" in your home. Under the terms of the pledge, your parents can decide on a specific limit for the guarantee and, once you no longer need mortgage insurance, you can ask for their guarantee to be released. That's a real advantage over traditional guarantees, where guarantors are generally responsible for the full amount owing until the loan is repaid.
Is that what the Commonwealth Bank is offering? The Commonwealth's Family Equity package offers five options for your parents, or other family members, to help:
* Guarantee the loan repayments (which means they guarantee the full amount of your loan).
* Take out a second mortgage on your home and be responsible for that mortgage themselves (which means they are only responsible for that part of the overall borrowings).
* Use their own property as security for your loan (which means they effectively guarantee your full home loan).
* Take out a mortgage on their own property and give you the proceeds to help buy your home (which means they are responsible only for their own loan).
* Provide their property as security for your loan and help with the loan repayments (which, again, makes them guarantor for your full loan).
The Commonwealth says each option has been designed to cater for different needs. If you have your deposit, but need help with your repayments, your parents may be able to guarantee your loan or take out a second mortgage on your property. (The second mortgage may be the more attractive option for your parents, as they'll be responsible only for that second loan, not the whole amount borrowed.) if you need additional security, one of the other options may be better.
Can I do these things without using one of these packages? Most lenders will consider options such as guarantees, second mortgages and using alternate properties as security for the loan. It's a matter of working out what you want to do and presenting it to potential lenders. St George and Commonwealth have simply made it easier by pre-packaging some alternatives.
What's the downside for my parents?
If your parents guarantee your loan, that means the bank can chase them for the money if you fail to keep up with your repayments. There have been more than enough salutary court cases in recent years to suggest your parents should think very carefully before agreeing to this. In the worst case, they could lose their own home if you fail to live up to your loan obligations. If you are considering some sort of guarantee arrangement, make sure both you and your parents get independent legal advice and read the contracts carefully so that you know exactly what you're all getting into. In some cases, it might be better to just postpone that home purchase.
© 2004 Sydney Morning Herald