Banks and other lenders have relaxed their lending standards. Low and even no deposit loans are on the rise again. Consequently, home loans with less than a 10% deposit make up about 15% of all new loans approved.
One of the problems with a deposit of less than 20% of the loan is that you will be required to take out lender’s mortgage insurance.
If you want to buy a $400,000 house and have only a $20,000 deposit, with mortgage insurer Genworth
you’ll be up for about
- $12,500 if you’re a first-home buyer
- $14,000 if you are up or down sizing
A handful of lenders allow you to add the insurance premium to the loan which would leave you with precious little equity in the home. If you paid a few thousand dollars more than the property was worth there’s a real chance you won’t be able to repay the mortgage if you had to sell the home.
while the lender is protected by mortgage insurance, you aren't
And, while the lender is protected by mortgage insurance, you aren’t. “If you have to sell the house and there is a shortfall, you are facing bankruptcy. The mortgage insurer who wants to collect the debt will not be afraid to enforce the debt which may include making you bankrupt,” says Katherine Lane, from the Consumer Credit Legal Centre.
One way to avoid paying mortgage insurance is to ask a family member, such as a parent, to guarantee all or part of your loan:
- a guarantee allows you to borrow up to 100% of the value of the home without paying mortgage insurance.
A guarantee can also be required:
- if your income isn’t enough to service the loan repayments
- if you haven’t got a good credit standing, for example, you might be a recent graduate and haven’t had your job for long.
The lender will ask for a mortgage on the home of the guarantor. For elderly parents who are no longer in the workforce and who might have worked all their life to pay off the family home, a guarantee is a high risk strategy and certainly not advisable.
“Don’t ever do it”, says Credit Ombudsman Raj Venga, who is aware of cases where parents have lost their family home in these circumstances. “As you can imagine, this can be very traumatic for the guarantors.”
If you’re a parent and want to help your children with their loan there are alternatives to going guarantor.
- Only agree to give a guarantee if you have enough savings to cover any problems that arise.
- Give a gift to your children to help them with the deposit – but check on gifting rules if you’re about to retire or on Centrelink payments.
- Take out an unsecured personal loan and ask your children to make all or part of the repayments – the interest rate will be higher but the risks are much smaller.
- NAB allows you to use a term deposit as security for the guarantee, which ensures your house is protected.
Finally, if things go wrong, and the lender threatens to sell the house, get legal advice immediately. If you make a complaint to the Financial Ombudsman Service or the Credit Ombudsman Service the bank has to pause enforcement proceedings while the complaint is assessed.
A really risky strategy
In a move to combine two risky strategies RAMS is lending up to 120% of the value of the home. This is enough money to not only buy the home but also consolidate other debts such as credit cards into the mortgage and pay for home improvements.
: You need to get your parents or a sibling to go guarantor and put their own home on the line. They need to take out a mortgage for 125% of the difference between the loan and what your home is worth. So if your home is worth $400,000 and you take out a loan for $480,000 they have to take out a mortgage for $100,000.