Tuesday, October 23, 2018

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It pays to be nice to your Mum and Dad. Yes, they can nag you and can embarrass you in front of your friends. But remember, they also love you and are always there for you... and, if you are lucky, they might also help you move into your first home. 

In a recent survey by the lawyers Slater and Gordon, 26% of Generation Y said they would need some help from their parents to get into their first home. That is great if you have affluent parents and The Bank of Mum and Dad can afford to gift you a generous home loan deposit. 

But even if your parents are not in a position to help you out with a bundle of cash, there is still a way they can give you a financial leg up. If they own their own home, they can help you get you first step on the property ladder by becoming a guarantor of your home loan. 

What is a parental guarantee?

It is when a parent uses the equity in their home as security against a loan taken out by their child. For example, if a mum or dad has $500,000 equity in their home, they can put up part of that - say to the value of $100,000 - to provide their child with additional security value, allowing them to borrow more of the purchase price of their new home. 

What are the benefits:

  • Saving for a deposit can be hard, especially if you are already renting. Using the equity in your parents' house as a deposit means you can skip having to save for a deposit, and can move into your own home faster.
  • If you do not have a deposit of 20%, lenders require you to take out lenders' mortgage insurance (LMI), which covers them if you are unable to meet your repayments. A parental guarantee can potentially mean avoiding or reducing the cost of LMI.
  • As long as you make your mortgage repayments, it does not cost the guarantor anything.
  • Once you have built up enough equity in your home, or have paid off enough of the mortgage, your guarantor can be released from the agreement, as the security is no longer needed, although this might incur fees.

Potential risks:

  • With all loans, there are risks involved. If you default on your mortgage, your guarantor is liable for the entire sum that they have promised to cover, which is the worst-case scenario and could lead to them losing their home.
  • After agreeing to act as your guarantor, your parents' ability to take on further loans for themselves or others will be diminished. 

Of course, as with all financial decisions, securing a parental guarantor is not something that should be rushed into without speaking to the experts. But by doing your homework and working with your trusted mortgage professional, tapping into the equity in a parental house could speed up your move into a family home of your own.

 

Credit Wise

How would you feel about paying an extra 15% more for everything you buy? If you don't pay off your full credit card balance each month, the chances are that you are already paying that much extra in credit card charges. Depending on what type of credit card you have, annual interest rates can be anything from 21% - for no fee cards, that come with rewards - to 8% for low fee cards. 

Sure, having the ability to buy what you want, when you want, is handy and thanks to the internet and your credit card, your wildest consumer dreams are only a click away. But it's something that comes at a heavy cost. A bargain is not a bargain once you add the credit card interest charges. 

Therefore, there's never a wrong time to get credit wise, control your spending and stop dropping your hard earned money on padding out the banks' fat profits. 

Here are some tips for an interest free future:

Use your savings
If you have any savings or investments, it is unlikely that you are getting a return as high as the interest rate your credit card provider is charging, so use your savings to cancel your debt. 

Switch cards
Many credit cards offer interest-free periods for balance transfers. Switch your balance to one offering a 0% grace period, and use that time to get serious about reducing your debt. Otherwise, if reducing your debt to 0 within the interest-free period isn't an option, choose a card with the lowest yearly interest rate instead. 

Consolidate
With homeloan interest rates at an all-time low, it has never been a better time to consolidate your debts into one manageable sum. Talk to your Mortgage Broker and they will be happy to organise finance that will pay off your credit card debt, adding the sum to your home loan. It is a simple process that could potentially save you thousands of dollars. 

And once you have paid off your credit card debt, keep it off! Debt is like a diet, you have to work at keeping the numbers off...

Debit not credit
Keep your credit card tucket away at home, for use in emergencies only. Use a debit card for all other purchased. Move direct debits from your credit card to your current account. This way you will avoid billl shock at the end of the month and limit yourself to spending only the cash in your bank account. 

Learn to save
If you want to make a big purchase, make sure to set up a savings plan and stick ot it. If your hot-water heater packs up and it needs replacement immediately, the latest 55'' OLED 4K Ultra HD TV, you can live without until you have saved the required money. 

Resist temptation
Easy credit, its like a drug - you get an instant high from your purchase, followed by a nasty comedown when you get your bill. Think before you waste your money on unwarranted purchases and learn to just say no!

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Contact Details

Zippy Finance 

PO Box 3078
North Turramurra
NSW 2074

T 1300 855 022 

Louisa Sanghera is a credit representative (437236) of BLSSA Pty Ltd ACN 117 651 760.  Australian Credit Licence 391237. ABN 85 168 278 975.

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