Missed opportunities for buyers not using guarantors

by Rebecca Pike21 May 2018

Around 95% of first home buyers are potentially delaying or missing the opportunity to get into the property market by not including a guarantor on their home loan.

According to research from Mortgage Choice and CoreDate, only 4.9% of first home buyers said they used a guarantor to purchase a property.

Mortgage Choice CEO Susan Mitchell said the data raises the question of whether first home buyers are missing an opportunity.

Currently, the average first-time buyer needs to put down approximately $100,000 in deposit to secure a property with the median dwelling value of $554,605.

Mitchell said, “For many first-time buyers, the biggest hurdle they face is saving a sufficient deposit that amounts to 20% of the purchase price and this has been made even harder by strong property price growth over recent years.”

The Evolving Great Australian Dream 2018 whitepaper found that 40% of buyers would need some form of assistance to enter the property market, as they had just 15% or less of the required deposit for a property.

Mitchell said it was important for buyers and their prospective guarantor to weigh up the pros and cons and that mortgage brokers were the right people to speak to.

“The Government’s new plan to allow older Australians to stay in their homes for longer, as part of the ‘More Choice Longer Life Plan’ is likely to hinder the supply of available properties to those looking to buy their first home,” Mitchell said.

“One way first home buyers can get a leg up onto the property ladder is to access intergenerational wealth, created by the boom in the property market and ask a parent to be a guarantor by offering their own home as extra security.

“This strategy lets them get onto the property ladder sooner rather than later and with a smaller deposit and has the added advantage of avoiding Lenders’ Mortgage Insurance, which can total thousands of dollars for cash-strapped first home buyers.”

She added, “If a buyer has a guarantor on a home loan, it is essential they speak with a qualified mortgage broker and a solicitor to protect both parties.

“Having a family member go guarantor on a mortgage is not without risk and as such, no one should jump into the situation until they’ve given it considerable thought.

“If the first home buyer defaults on their home loan, the guarantor becomes responsible for paying their debt. This can be a significant financial impost for the guarantor as it can affect their ability to cope with their own day to day costs, which in turn compromises their financial wellbeing.

“Their own ability to borrow money will also be reduced after they agree to become a guarantor.

“As a result, it is very important for both the buyer and the guarantor to set clear expectations from the outset and think carefully about their future plans.

“It is helpful to note that a guarantor is not tied to the loan for its entire duration. Once a buyer has built up sufficient equity in their property, a guarantor can apply to be released from the loan, though this may incur a fee.

“Lastly, buyers should always look at their other options as a guarantor is not the only way that someone can purchase a property. A buyer can receive a one-off financial gift to help cover part or all of the cost of the deposit, which reduces the risk to a potential guarantor.”

The whitepaper research revealed that on a whole, 15.2% of prospective home buyers across Australia would have someone go guarantor on their loan.

Home buyers under 29 years old were the most likely to use a guarantor, with 21.8% saying they had someone as guarantor on their mortgage.

On a state by state comparison, Western Australia had the highest proportion of prospective buyers saying that they would have a guarantor on their mortgage, at 16.5%. They were followed by New South Wales at 13.9% and Victoria at 13.3%.

Of those who purchased with a guarantor, 77.2% said their parents were their guarantor.

 

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