Getting around mortgage insurance

MOST young people understand the importance of buying a home as soon as they can afford it, but a big obstacle is mortgage insurance.

The purpose of mortgage insurance is to protect the lender if the borrower gets into financial difficulties, and is always a condition of the loan if the deposit is less than 20% of the valuation.

It can be a hefty slug because insurance on a loan of $570,000 could be as much as $22,000 if the borrowers only had 5% deposit.  To make matters worse, stamp duty is also added to the insurance premium.

Unfortunately, mortgage insurance premiums are not usually transferrable so it is almost impossible for borrowers to change lenders while their equity is less than 20% of the loan value.

There are now some lenders offering a way out. They structure the loan so that the deposit is covered by a home equity loan on the parents' home. This eliminates the need for mortgage insurance, and enables the children to take out a smaller loan as no mortgage insurance is added to it.

I think it's a great idea but I do want to sound a word of warning. If you adopt this strategy, you are effectively going guarantor for your children and the lenders will be looking to you for payment if the children fail in their financial obligations.

You need to satisfy yourself that your children have the maturity and the financial ability to repay the loan without recourse to you. It's a wonderful gift to your children if used in the right circumstances - you should always reserve the right to withdraw your guarantee once the children have built up sufficient equity in their home.