Media speculation is constant over the reasons people find it a great challenge to buy their first home. Is it financial restrictions or a lack of willingness to compromise on lifestyle goals?
Irrespective, there is anecdotal evidence that parents are increasingly coughing up cash for a deposit or going guarantor on a loan to assist their kids in their home ownership goals. Mortgage Choice recently backed up this anecdotal evidence with survey results, finding that approximately 5% of all first home buyers had a parent or immediate family member go guarantor on their home loan.
Home loans with a guarantor
One option for breaking into property the market is to ask your parents if they would be willing to go home loan guarantor. It’s not a request that should be made or granted lightly. If your parents go guarantor on your loan, it means that they will be liable for the loan if repayments are not made. To be a guarantor also means that your parents need to be able to demonstrate their own capacity to repay your loan.
Guarantor information you need to know
“From time to time, friends or family are asked to be a co-borrower or guarantor on a home loan,” says the former CEO of Hume Building Society, Andrew Saxby. “This person becomes liable for the loan if repayments are not made and for this reason this scenario is usually limited to children and their parents.”
— Canstar (@CANSTAR) September 26, 2016
Mr Saxby points out that there is little difference between a guarantor and co-borrower. In both instances, all parties need to demonstrate repayment capacity in their own right and both have potential ultimate responsibility for the debt – co-borrowers at all times, and guarantors in the event that the borrower fails to meet their repayment obligations. That responsibility is something that parents – busily stockpiling savings for their own retirement – should take very seriously.
“Parents must be comfortable with the repayments of the loan they are securing, so that their home is never at risk,” says Mr Saxby.
“Job security and family relationships need to be considered. If parents are close to retirement, they need to ensure they can still afford the commitment when they retire or ensure they have other options to repay that debt, such as access to their superannuation.”
Fortunately, there are some safeguards that parents can put in place, with the most important being to limit their exposure to the debt. At Hume, this is managed by:
- Separating the debt into two loans and maximising the loan amount that is just in the child’s name. This is done by using the child’s property alone for the majority of the loan.
- The remainder of the debt is then in the name of the borrower and co-borrower with both the child and parents’ properties as security. This amount should be minimal in comparison.
“Guarantors are required to seek independent legal advice,” says Mr Saxby.
“Hume requires the co-borrower attend the loan interview with the borrower and suggest they also consider independent legal advice.
“Co-borrowers and guarantors must be fully aware of the borrower’s financial situation. There can be no secrets. It is best that the child has one commitment – in too many cases there are additional personal loans that cause problems.
“My advice to parents is to keep the debt to a short-term and to ensure their children are very clear on the impact on their parents if they fail to meet their obligations.”
The good news is that a guarantee does not have to be forever – it can be removed down the track once the kids are well established.
“The child’s property can be revalued and the parent’s home released when there is sufficient equity in the child’s property,” says Mr Saxby.
Canstar research of 98 home loan providers in September 2016 found that 72% of lenders allow for a parent to go as guarantor. Under an arrangement with a parental guarantee borrowers can still borrow up to 100% of the property value.
Now equipped with this knowledge, you can compare home loans on the Canstar website that have parental guarantee available. We have provided a snapshot of the current low rate home loans available for First Home Buyers that accomodate for parental guarantee and feature links direct to the providers’ website. Please note that this table has been generated based on a $500,000 loan in NSW.