Creeping over the $500,000 purchase price for a property can play havoc with some first home buyers’ plans to get their foot in the door of the property market. This is because the moment you go beyond $500,000 in NSW, Queensland and Western Australia, you have to pay stamp duty. (It varies in other states and territories)
Even though it’s a gradated scale in NSW between $500,000 and $600,000, having to pay stamp duty could significantly pump up the amount you have to find in addition to your deposit.
With that in mind, and with investor demand for two bedroom apartments on the rise, first home buyers are watching prices get further and further from their grasp in many areas of Sydney and, to a lesser extent, Melbourne.
Stamp duty slug
Say you were to buy a property at $500,000 and you had a $50,000 deposit. You would then need to borrow $450,000. There is no stamp duty to pay at this level, so you would only be up for lenders mortgage insurance of $6600.
But what if you chose to pay $600,000 for a property? Let’s assume you still had a 10 per cent deposit. So you would have a $60,000 deposit and need a loan of $540,000. But at a $600,000 purchase price, stamp duty applies. In NSW, this would equal an additional $22,490 in stamp duty payable. That would then mean you would need to borrow approximately $562,000. That’s 93.7 per cent of the value so you would definitely be up for lenders mortgage insurance too.
According to Genworth Financial, a $562,000 mortgage on a $600,000 property would cost you a further $22,236 in lenders mortgage insurance (from them) as a first home owner, which in itself includes a NSW stamp duty slug on the insurance of $1836.05. All of a sudden, a $600,000 property requiring a $60,000 deposit now needs you to cough up a further $44,000!
So how do you get around this? One way to potentially avoid having to pay lenders mortgage insurance is for your parents to become limited guarantors for you. A number of lenders now offer some form of limited guarantee. They don’t have to go guarantor for the full amount, just for the amount between 80 per cent equity and, to continue with our example, the 93.7 per cent quoted above – $562,000 minus $480,000, which is $82,000 – so you can avoid paying lenders mortgage insurance.
The good news for your parents is that the guarantee is not for the whole term of the loan, but only until the loan falls below the 80 per cent valuation mark. Generally this can take a few years. It will then be up to you or your parents to check the valuation of your property at that time to see if the loan balance has fallen below 80 per cent of the current valuation. Once it has, the guarantee can be cancelled.
Even more importantly, as long as nothing goes wrong, this generosity can be achieved without your parents having to put their hand in their pocket.
While it doesn’t necessarily have to be your parents going guarantor for you, they are probably the most likely candidates to be willing to go guarantor for you.
Of course, going guarantor for anybody can still be riddled with potential problems. The NSW Department of Fair Trading states on its website that becoming a guarantor is something “that shouldn’t be taken lightly”.
It goes on to say that if you don’t pay, your guarantor will have to. “If you stop making payments, the home loan provider will first take action against you. They can usually only take action against the guarantor after they have tried all avenues to get the money from you.”
Furthermore, your parents will need to have sufficient equity in their home for it to be used as collateral. In the first instance, their house will be valued and the lender will then look at what equity they have in their property. Your parents will also need to see a solicitor to ensure they understand their obligations.
Assuming all goes well, it could be a good way to save paying $20,000 out in insurance at a time when you can probably least afford it.