This article first appeared on The Property Investor – http://www.tpimag.com/smart_money/financing-your-deposit-alternate-routes/
When it comes to saving for your deposit, sometimes, no matter how hard you try, you fall just short of your goal. Trust me, I get it. Saving and budgeting is hard work, and with ever increasing house prices, sometimes saving enough on your own is just not do-able. The important thing is to not let this realisation dishearten you… while your first plan may not have worked out, it’s important to remember there is more than one way to reach your goals!
There are a few different options you have if you find yourself unable to finance your deposit on your own.
1. Property Share
Property share allows you to split the cost of buying a home with family or friends, while still being in control of your individual finances.
So how does it work exactly? There are a number of things you need to check off to be eligible to apply for Property Share.
Each borrower must intend to be a part owner of the property
Each borrower must be able to prove they can easily repay their portion of the home loan
You will all need to act as guarantor for each other’s loans as an extra security support
You have to seek legal advice before you’re allowed to sign the Property Share Authority Declaration
Property share can be used on most home loans and the features and rates of that loan will apply like usual.
There are a number of reasons this option is beneficial to those who can’t afford a deposit on their own. Number one, it allows you to pool your money together with close trusted friends or family, allowing you both to enter the property market sooner than you would have been able to on your own (and you won’t have to save as much for the deposit). You’ll also be able to borrow more funds combined then you could on your own, meaning you can invest in a better property that’s in line with your goals, rather than settling for something less.
Each individual does not have to share equally in the property – you can split the costs however you want, so it’s up to each person how much they want to loan, the duration they want their loan to be for, as well as how they want to manage their repayments. Property share also opens up access to a range of beneficial features, such as redraw facilities, mortgage offset accounts and lines of credit.
2. Parental Guarantee
This option is becoming increasingly popular, particularly amongst the younger generation. This method allows the bank to use some of the equity in your family property to help out as extra ‘security’ for a loan. This can be either out of the family home or an investment property.
So how does it work? Basically, the bank will take a mortgage over the child’s property and also over the parent’s property, meaning they have more “security” for the loan.
Acting as a parental guarantee will help your kids get ahead in two main ways. Number one, It lets them buy faster, rather than waiting for years to save up enough for a deposit on their own, and number two, it removes the need for them to pay mortgage insurance.
(Remember that mortgage insurance is payable when the loan is more than 80% of the purchase price. Mortgage insurance rates can vary but it can easily be $10,000, $15,000 or even $20,000 in some cases.)
You might be sitting there thinking this idea seems completely crazy. Am I right? While it might seem a bit far-fetched, it’s important to note that these guarantees are not like the old style guarantees where Mum and Dad put their whole house on the line. These days the guarantee is limited to an amount (eg. 20%) of the value of the kid’s place, PLUS the loan remains in their name, not the parents.
So there you have it! Two alternative deposit options you might like to consider if you can’t finance your deposit on your own. Remember though – while these options are fantastic alternatives for some people, they are not guaranteed to work for everyone. That’s why it’s important to keep in mind your personal circumstances and goals before you jump in or make any big decisions. It always pays to consult with an expert as well!
Have any questions? Feel free to leave a comment for me below!
Until next time,