Guarantor Structure & Protecting Parents' Equity

Virginia Graham Riches: I'm Virginia Graham, author of Flirting with Finance and host of the podcast. Today I'm joined by Julianne Zammit, a senior broker at Finance on the Coast, to explore the finance side of property risk and how smart lending structures prevent costly mistakes. Welcome, Julianne.

Julianne Zammit: Hi Virginia, lovely to be here.

Virginia: Back to our first-home buyer in Sydney looking for a unit — what do they need to do to get their finance ready?

Julianne: Get a pre-approval, so you've got something in place when you go shopping; it also signals that a lender can look after you based on the information submitted. It's only a pre-approval, so the bank still values the property. And always get a finance clause — especially as a first-timer — because an auction, or buying before auction, runs under auction conditions with no finance clause, and we need to be able to value the property. In New South Wales settlement is usually 42 days, or six weeks; lenders can often go quicker, but a First Home Guarantee reservation can take around ten days to process, so 42 days is the ideal turnaround.

Virginia: There are two schemes being talked about now?

Julianne: The new one hasn't come into play yet. The one most people are using lets you buy up to $900,000 in New South Wales with as little as a 5% deposit, with the government guaranteeing the other 15%. There are stamp-duty concessions up to $800,000, phasing out up to a million. Borrowing capacity is still based on the bank's requirements, but the deposit scheme adds the government's rules — your income, whether you're a permanent resident or citizen, and that you haven't owned a property before, or not in the last 10 years.

Virginia: What about guarantors?

Julianne: Lenders accept guarantors, especially for first-time buyers — mum and dad helping out. It's a security guarantor, not an income guarantor, so you still have to afford the full loan. The maximum you can normally borrow is 105% — 100% of the value plus 5% for costs. It's typically structured as an 80% loan on the property you're buying and a 20% guarantee against the parents' home.

Virginia: When can the guarantee be released?

Julianne: As soon as you're at an 80% loan on the property. If a later valuation shows the purchased property can secure the loan on its own at 80%, you do a partial release of the guarantor's security — provided there are no arrears.

Virginia: And when they want to use that equity for the next purchase?

Julianne: Reach out straight away and we'll talk numbers. The key is having more than 20% equity in your current property if you want to use some towards another purchase, because borrowing above 80% means lenders mortgage insurance — LMI. We do a valuation to work out the equity, and because Sydney prices are still moving quickly that can build fast. But there are two things to cover: equity, and affordability — responsible lending means the lender must know you can afford the loan, factoring in the rent you'd get.

Virginia: Do you help clients Australia-wide?

Julianne: Yes. Lending is the same wherever the client is, but stamp duty, schemes and settlement timeframes differ by state. New South Wales is stamp-duty free up to $800,000 and pro-rata to a million for first-home buyers; Victoria, WA and South Australia are more expensive. Cooling-off periods differ too — Queensland is normally a one-week settlement, and in a hot market buyers sometimes can't exercise a cooling-off period or they'd miss out.

Virginia: Tell us about SMSF loans.

Julianne: We do them for residential and commercial. Hardly any major bank does them anymore, so it's mainly second-tier lenders. Residential is an 80% lend and can't be owner-occupied — it has to be rented out, because it's a self-managed super fund. Commercial is usually a 70% lend, and a lot of people buy owner-occupied and lease it to their own business for office or factory space. Some lenders are very specific on postcodes for SMSFs, with reduced LVRs in regional areas, so it's important to check before getting a pre-approval.

Virginia: And your best tips for investors?

Julianne: Same starting point — would I live in this property? From a loan view, investment rates are slightly higher. I look at the client's whole position: how many loans they have, one income or two, how much spare cash flow, and whether interest-only or principal-and-interest suits them. Some clients keep multiple investment loans on variable with 100% offset for flexibility, then fix the next purchase to reduce risk if their income might dip for a while.

Julianne: Each property generally has its own separate loan and offset, so the rent and expenses for that property go into its own account — which can be the offset for that loan. You might also hear 'cross-collateralisation', where you tap equity in one property to buy the next; it's still a separate loan, so you can keep the expenses separate, and you can nickname the accounts in the banking app.

Virginia: And downsizers?

Julianne: Not as much yet, but it'll grow as the population ages and kids move out. I did it myself — a seven-bedroom home, then downsized to a unit by the beach with a smaller mortgage, the best decision ever. A lot of downsizers diversify, using the equity to buy investment properties or top up super. And interestingly, two smaller properties often grow faster than the one larger house they sold.

Julianne: One thing I tell first-home buyers: it's very hard to save a 20% deposit now. To buy at $800,000 in New South Wales and get the stamp-duty concession and avoid mortgage insurance, you'd literally need a $160,000 deposit — but under the scheme you can get in with as little as 5% to 10% and the government guarantee. The spirit of it is to help you buy your first property: you need to live in it for at least 12 months to get the stamp-duty exemption, and until the loan reaches an 80% LVR under the guarantee scheme. It may not be your forever home, but it saves you a lot in rent.

Virginia: Brilliant advice, Julianne — thank you. And a last tidbit from Kathleen: if you've owned a home as an owner-occupier in your own name, you generally can't get the first-home concession again — unless your first was bought under a company. That's the New South Wales rule, and rules change all the time. General information only.

Julianne: My pleasure.