Saving up a deposit and buying your first place can seem impossible for first home buyers. For many though, the impossible is made possible thanks to the bank of Mum and Dad. It’s become quite common for new buyers to ask their parents for help when it comes to saving up a deposit but there’s also been an increase in parents becoming guarantors to get their kids into the property market.
A guarantor is someone that is guaranteeing a loan by offering up their own assets as security. Because the mortgage provider has the guarantee of those assets to fall back on, a first home buyer with fewer assets can access products like no deposit home loans and low deposit home loans that mortgage providers will not normally offer someone with a smaller financial footprint. However, remember that the guarantor does become liable for the debt if you default and miss your loan repayments.
Getting Mum and Dad to guarantor your home loan offers you many benefits, but perhaps the biggest is not needing a deposit to get a loan that covers the full cost of buying a property. In some cases, you can even borrow up to 105% LVR to help pay for additional costs such as stamp duty. Another plus is you’ll avoid paying Lender’s Mortgage Insurance (LMI). Lenders generally charge LMI on loans with less than a 20% deposit to protect themselves in case of the borrower defaulting. If you have a guarantor though, the lender will consider themselves covered by your guarantor if you miss your mortgage repayments.
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There are a few different options available when it comes to guarantor home loans, so it’s best to discuss first with your parents on how much responsibility they are willing to take.
This is the most common type of guarantee and is when a guarantor will secure your loan against their own property. A lender can sometimes accept a second mortgage as a guarantee too.
This is when the lender and borrowers will establish a limit for how much the guarantor will be liable in case of defaulting. This protects the guarantor a little more as they aren’t expected to be responsible for the entire loan.
This is when the lender will need the guarantor to provide a loan security and proof of income. This is a preferred option for first home buyers with low incomes where the guarantor will start paying off the loan with their income first until the first home buyer can afford to.
Another option for parents instead of committing to become a guarantor is gifting a deposit. This is the easiest way your parents can help you get closer to home ownership. If you’re getting your entire deposit gifted by your parents, you’ll need to prove to lenders that you also have good saving habits and a generous income to back it up.
Before you go down the path of guarantor loans, it’s important both you and your parents understand the ins and outs of how they work and the risks that come with doing so if you happen to default. It’s a good idea to talk to an expert before your parents choose to guarantor your loan and you are properly prepared for the responsibility of home ownership.