The Bank of Mum and Dad - Guarantor Loan vs Gifted Deposit

The journey to homeownership in Australia, particularly in bustling cities like Sydney and Melbourne, often feels like an uphill battle due to the soaring property prices. Many first-time buyers find themselves turning towards their families for that crucial financial boost. 

Guarantor loans and gifted deposits are the two main choices when it comes to family assistance in your home buying journey. But which one is right for you?

What’s A Gifted Deposit?

A gifted deposit is when a family member, usually parents, gives you a sum of money to use as a deposit for your home purchase. This direct financial boost can make a significant difference in your buying capacity.

Pros:

• No Collateral Risk: The family's property isn't used as security, so there’s no risk of losing it if financial difficulties arise.
• Avoid LMI (Lenders Mortgage Insurance): By covering at least 20% of the purchase price, you might sidestep the costly Lenders Mortgage Insurance, reducing overall loan costs.
• Immediate Equity: You start off with more equity in your property, improving your loan-to-value ratio (LVR).

Cons:

• Financial Strain: The donor needs to have disposable income or savings, as the gift is non-repayable.
• Dependency: Reliance on a gift may not always encourage financial independence or savings discipline in the buyer.

A gifted deposit can be a straightforward way to increase your immediate equity in a new home. For insights on leveraging this approach, check out our guide on maximising property investment.

What’s A Guarantor Loan?

In a guarantor loan, a family member offers their own property as security for your mortgage. This can increase your borrowing power and potentially eliminate the need for a deposit.

Pros:

• Higher Loan Amount: Potential to borrow 100% of the property’s value, or even cover additional costs like stamp duty.
• Save on LMI (Lenders Mortgage Insurance): Similar to a gifted deposit, having a guarantor can help you avoid LMI if the guaranteed amount covers 20% of the purchase price.
• Support Without Direct Financial Gift: Ideal for families not in a position to provide a cash gift but who have sufficient equity in their property.

Cons:

• Financial Risk for Guarantor: If you fail to make repayments, the guarantor’s asset is at risk.
• Impact on Guarantor’s Credit: Being a guarantor could affect their borrowing capacity, as the guaranteed loan is considered a liability.
• Potential Relationship Strain: Financial agreements can sometimes strain familial relationships, especially if repayment issues arise.

Understanding the implications of becoming or having a guarantor is crucial. For more information, consider consulting a buyer’s advocate.

Factors To Consider When Choosing Between A Guarantor Loan and Gifted Deposit

Both options offer unique advantages, but the right choice depends on your financial situation and family circumstances. There are several factors that come into play, including:

• Financial Stability: If the borrower has a steady income but lacks enough for a deposit, a gifted deposit might be preferable. Guarantor loans could be a better fit for those with less predictable income streams.
  
  
• Family’s Financial Health: The family’s ability to gift funds without impacting their financial security or retirement plans is key. If gifting is not viable, offering to be a guarantor might be an alternative, provided the risks are understood and accepted.
  
  
• Long-term Financial Goals: Both options should be weighed against the family's and the borrower's long-term financial objectives. Sometimes, a combination of both might even be the best approach.

H2: Which Path Is Right For You?

If you have a reliable income but are short on savings for a deposit, a gifted deposit could be your ticket to homeownership without burdening your family's assets. It offers a straightforward boost to your buying power, potentially enabling you to bypass lenders mortgage insurance (LMI).

Conversely, a guarantor loan might suit you if saving for a deposit is unfeasible. It allows family members to use their property's equity as security, giving you a leg up in the market. However, it does place your guarantor's assets at risk if repayments falter, and could impact their borrowing capacity.

Your Path To Home Ownership

Whether through a guarantor loan or a gifted deposit, family support can significantly ease the financial hurdles of entering Australia’s property market. Each option has unique benefits and considerations, making it imperative for potential homeowners and their families to conduct thorough research, engage in open dialogue, and possibly seek professional advice.

At Zacky Property, we're committed to helping first-time buyers understand their options and navigate the complexities of the property market. Whether you're considering SMSF property investing or taking your first steps towards homeownership, we’re here to provide the guidance you need. Ready to explore your options? Contact us today to learn how we can support your journey to owning your first home.

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