thinking outside the square to get into your home
The market for first home buyers is pretty tough these days, so thinking outside the square is becoming a lot more commonplace. If you haven’t managed to achieve the elusive 20% deposit yet don’t despair – there are ways and means! One option is to use a parent as a guarantor (so you use their funds/equity as your deposit). Another option is vendor finance.
What is Vendor Finance?
It sounds scarier than it is, but in reality it’s pretty straightforward. The basic idea is the vendor (seller) agrees to ‘leave’ part of the deposit in the property. In practical terms you would agree on a purchase price with the vendor and then pay 80% of the sale price at settlement time.
The deposit left in the property (the remaining 20%) is then repaid to the vendor as a 2nd mortgage, repayable over a 5 year period. If you do already have some deposit then the 20% figure can be reduced accordingly.
For example: If you agree to purchase a property for $400,000 then we would help you would borrow $320,000 (80%). The remaining $80,000 would be the 20% deposit provided as vendor finance. The $80,000 would be repaid to the vendor over the next 5 years at a rate higher than current banks offer (so, e.g. 7-8%) to ensure the transaction is attractive for all parties (buyer and seller). In order to keep your repayments to a manageable level it often makes sense to have your larger mortgage repayments on an interest-only basis initially, which you can do up to a maximum of 5 years in most cases. The vendor finance would be on a principle and interest basis.
Vendor finance is a great option for some, especially if the market is a bit slower. As you can imagine there is a bit more legal work to be done beforehand with such a deal, but if you are struggling to save the deposit you want then this is definitely an option worth considering.
If you think this could be a good option for you, then contact me anytime to discuss this further. You can reach me on 027 526 5438.
Brian MacLean looks into tips, ideas and strategies you can use to get ahead financially..