By Shirley Liu
You may like the idea of being able to help your kids buy their own home because you know how hard saving for a 20 per cent deposit can be. Mum and Dad stepping in as guarantor can suddenly make it much easier for your kids.
Buying a home with a guarantor lets the buyer purchase the property with a smaller deposit – say around 5 per cent instead of the standard 20 per cent. Depending on the type of loan, the buyer may be able to borrow the upfront costs of buying a house – things like stamp duty, valuation, application and legal fees can add up to thousands – as well as eliminating the need for any deposit at all.
While it sounds great for your kids and may seem doable from your end, there are some things you need to know before signing that dotted line.
Deciding to ‘go guarantor’ could potentially save your kids thousands of dollars. If their loan exceeds 80 per cent of the property value Lender’s Mortgage Insurance (LMI) is usually charged, but waived if you have a guarantor. As a ballpark figure, a house valued at $500,000 will incur an LMI of 3 per cent, which is $15,000. As most first home-buyers tend to borrow around 95 per cent of the property value, you can see how valuable guarantor help can be.
As mentioned before, being a guarantor also means that your kids don’t need to save up a deposit. Given the value of properties in today’s market, trying to save up the typical 20 per cent deposit as well as the money to cover the upfront costs can be a challenging goal. Yet with a guarantor, it’s possible to borrow the entire property value plus the funds needed to cover the upfront costs.
A guarantor role has the benefit of helping your kids enter the real estate market sooner rather than later. When there is enough equity in their home for your kids to refinance the property back to their own name, you can have your guarantor responsibilities removed.
If you agree to become a guarantor for your kids, it means you effectively agree to take over the repayments for the loan in the event that your kids are unable to make them. Depending on the type and term of the guarantee, you may be liable for the whole amount borrowed or the amount of the loan that was secured by your own property.
There are several different types of guarantees you can offer your adult children. These are:
– Security guarantee: the equity you have in your family home becomes the security for your kid’s mortgage.
– Security and income guarantee: the equity you have in your family home secures the property for a son or daughter, plus you guarantee that your income will be used to help the child repay the mortgage until they’re able to do so on their own.
– Family guarantee: banks use this term to indicate that the person acting as guarantor is directly related to the borrower, either as a parent, grandparent, sibling or other direct family member.
– Limited guarantee: if you only wish to secure a portion of your child’s mortgage, you can set up a limited guarantee. This can reduce the potential liability to you if things go wrong.
It is vitally important that you seek out independent legal advice about your obligations and any implications of being a guarantor. This is to ensure that you are well aware of what is required of you if the person you’re acting as guarantor for fails to meet their own obligations.
Of course, if you also intend to invest for your own retirement as well as helping your kids get into their own homes, you need to be aware that your borrowing capacity could be affected by being a guarantor. In most cases, banks will reduce the amount you can borrow to protect your obligation as a guarantor in case things go wrong.
Shirley Liu is a personal finance writer at Finder.com.au. She wants to help more Australian’s enter the market stress free. You only live once, so make sure your finances are in order.
After you comment, click Post. If you're not already logged in you will be asked to log in or register