The vast majority of first home buyers are obtaining their first home loan without a guarantor, but more than a fifth of those under the age of 30 do have someone go guarantor on their mortgage, new data has found.
According to Mortgage Choice and research consultancy Core Data’s Evolving Great Australian Dream 2018 whitepaper, which surveyed 1,000 Australians in March 2018, just 4.9 per cent of first home buyers (FHBs) used a guarantor to buy their first home.
However, the research also revealed that more than a fifth (21.8 per cent) of FHBs under the age of 30 did use a guarantor on their mortgage.
In total, the whitepaper revealed that 15.2 per cent of prospective home buyers plan to use a guarantor to obtain a home loan, dropping to 12.6 per cent for females.
On a state-by-state basis, Western Australia had the highest proportion of prospective buyers that plan to have a guarantor on their mortgage (16.5 per cent), followed by New South Wales (13.9 per cent) and Victoria (13.3 per cent).
Of the FHBs that purchased a property using a guarantor, 77.2 per cent said that their parents were their guarantor.
Speaking of the findings, Mortgage Choice chief executive officer Susan Mitchell said: “The data raises the question that many are divided on: Are first home buyers missing an opportunity to get into the property market by not engaging a guarantor?”
The brokerage CEO noted that saving for a deposit is the greatest obstacle to property ownership for FHBs, highlighting that FHBs would need to save at least $100,000 to secure a property (based on CoreLogic’s findings that the median dwelling value is $554,605).
According to the whitepaper, 40 per cent of buyers had saved less than 15 per cent of the required deposit for a property, and would therefore need some form of assistance to enter the housing market.
“For many first-time buyers, the biggest hurdle they face is saving a sufficient deposit that amounts to 20 per cent of the purchase price, and this has been made even harder by strong property price growth over recent years,” Ms Mitchell commented.
The brokerage CEO was also critical of the federal government’s More Choices for a Longer Life plan, announced in the 2018 budget, which would allow older Australians to stay in their homes for longer. The CEO claimed that the government’s plan could limit the supply of affordable home for FHBs.
The Mortgage Choice CEO suggested that one way that FHBs could “get a leg up onto the property ladder” was via “intergenerational wealth”. She explained that this was wealth that had been created by the “boom in the property market” and could therefore enable parents/family members to become guarantors on mortgages, should they wish to offer their own home as extra security.
“This strategy lets [FHBs] 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,” Ms Mitchell said.
Risks of using a guarantor
However, the brokerage CEO called on FHBs to weigh up the risks associated with using a family member as guarantor.
“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,” the CEO said.
“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.”
The Mortgage Choice chief also encouraged FHBs to explore all of their options before opting to use a guarantor.
“[B]uyers 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,” Ms Mitchell concluded.
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