So, you want to jump in and buy your first investment property, but have no deposit saved?
Well, I am very happy to share that we have a tried and tested approach which we recommend to our clients, allowing them to buy their first investment property with no (or a small) deposit saved.
Buying an investment property before you buy a home to live in, is a good idea to consider, especially with strong growth in property prices continuing into 2022.
If you already own property, you may prefer to read up on using the equity in your home as your deposit.
Ok, let’s get into it!
The approach we use, when you have no deposit or equity, is called a ‘family guarantee loan’.
It’s the best way for you to buy an investment property without a deposit.
What is a family guarantee home loan?
In this situation, you have a family member who already owns a property.
This is usually your mum and dad, or they can also be someone in your close family like a brother and sister.
They need to have at least 40% equity in their home already (meaning if the house is worth $1 million, the loan on it is no bigger than $600,000).
In essence, the bank will lend you up to 100% of the cost of the investment property, as the bank accepts a type of guarantee from your family member, which is secured against the equity they have in their property.
And because the bank has the additional security of the equity in your parents’ home, they’re happy to lend you the entire cost of the investment property plus enough to cover the buying costs (i.e. stamp duty, state government transfer fees, mortgage registration fees, your solicitor’s fees, building and pest inspections, and any other loan set up fees as well).
Benefits of a family guarantee home loan
- No deposit needed (borrow the full purchase price and costs);
- No need to pay Lenders Mortgage Insurance;
- Buy an investment property now rather than waiting longer to save the deposit;
- The interest rate offered is usually good (relative to not doing a family guarantee loan);
- Once the equity in your home reaches 20% you and your guarantor can apply to the lender to free the guarantor from their obligations and remove the guarantee.
What are the eligibility criteria of a family guarantee home loan?
You will still need to pass the bank lending rules for taking on an investment property loan which includes being employed, not having excessive debts like car or credit card balances, and having good credit history for example.
- The family member must own a property in Australia which can be used as additional security for the loan (the property can have a mortgage on it but generally needs at least 40% equity or more in it);
- Generally, your parents’ property needs to be in a very saleable area;
- Generally, your parents must either be working or be a self-funded retire (although check with me on this as there are exceptions);
- Generally, you can buy one investment property only under this scheme.
How does the family guarantee home loan work?
Here is an example of a situation where you want to buy an investment property for $500,000 and use your parents home as the security for the family guarantee loan.
- Investment property – costs
- Cost of property – $480,000
- Plus buying costs – $20,000
- Total cost – $500,000.
- Value of parents home – $800,000 (owned outright).
To qualify for the investment loan you would need to have the borrowing capacity for the $500,000 loan, taking into consideration:
- Your income, keeping in mind the investment property earns rent which will help with your borrowing capacity.
- Your own expenses, including living, car or personal loan repayments, credit cards, rent paid, and the tax benefit you get from owning an investment property.
The way the lender sets up the home loan is as follows:
The investment property loan is set up with what we call, two splits, which total the $480,000 cost of the property:
- Split 1: 80% (loan of $384,000) – is secured against the investment property.
- Split 2 : 20% (loan of $96,000) + buying costs of $20,000 ($96,000 + $20,000 = $116,000)
- Where 20% ($96,000) – is the family guarantee loan portion which is secured against the equity in your parent’s home and the investment property.
What’s the risk to my parents if I can’t repay the loan?
In the case where you are unable to make the loan repayments, this is generally what will happen.
In the example above, the risk to your parents is $116,000.
The bank will sell the investment property to get as much of that loan back as possible.
If the market has dropped and you only got $450,000 for the property (you paid $480,000), then the bank will use the proceeds, first to pay out the split 1 of $384,000.
Then with split 2, the remaining sale proceeds of $66,000 are paid out.
So your parents will owe $50,000 – which is the risk to them.
How do I learn more to see if this is the right approach for me?
The information contained within this page is general in nature. It serves as a guide only and does not take into account your personal financial needs. Before you act on this information you should seek independent legal and financial advice. Copyright Blackk Finance 2022.