Using a guarantor can help you achieve your home ownership goals
The easiest way around the deposit dilemma is to garner the support of your parents or close family members who already have considerable equity in their own homes, and are willing to support you by ‘guaranteeing’ your loan. In other words, you need someone to ‘go guarantor’ for you. Essentially, a guarantor is a close family relative, usually your parent/s, who has either paid off their own home or has a significant amount of equity in it. They must be willing to put that home up as security against your loan, and agree to cover your loan repayments if you default.
Most lenders offer guarantor loan products for first home buyers, although they go by different names, depending on the financial institution. Terms you might hear that refer to these types of arrangements include:
- Family Pledge
- Family Support
- Family Equity
- Fast Track
- Family Guarantee
Guarantor loans have many benefits for the borrower:
- You can get into the housing market more quickly
- You can borrow the money to cover your deposit if you don’t have enough savings
- You can borrow 100 per cent of the cost of the purchase
- You can avoid LMI, which can be significant
The main risk for the borrower is that they may be enabled by the guarantor to take on a larger debt than they can really afford.
The guarantor, however, faces a number of risks:
- They agree to put up all or part of the equity they have in their own home as security for the borrower.
- They may have to cover loan repayments if the borrower’s circumstances change.
- They may need the money back for an unseen change in their circumstances before the borrower is able to repay the funds.
While going guarantor can be risky, there are ways to minimise the risk. The amount of equity offered as security doesn’t have to be 100 per cent. It can be limited to an amount that equals the deposit required by the bank. This means that you can go ahead and borrow at ninety-five per cent LVR or less, and the guarantor’s security arrangement covers the other five per cent or more. Once you have repaid an amount equal to the guarantee, the guarantor can be released from their obligation to cover your payments, pending approval from the lender.
Another downside of applying for a guarantor loan is that the approval process can be quite lengthy. The lender will need to assess the value of the security being offered and the financial status of the guarantor.
PARENT ASSIST LOAN - A unique option
Here's how your parents could become your bank
Apart from actually gifting you the money or guaranteeing your home loan with the lender, there is another option whereby parents can avoid risking their own financial situation or their home. It is a formal, managed loan through a bank or lender and it helps to keep everything above board and official.
This new product is called a Parent Assist loan. Basically, it takes the form of a structured loan between you and your parents and can cover an amount up to 100 per cent of the purchase price, depending on what your parents are willing to lend you.
A typical example might be that your parents lend you twenty per cent of the purchase price: equivalent to a deposit. And then, the bank provides the rest. You repay both your parents and the bank with interest. In some instances your parents might agree to accept a far lower interest rate than the bank.
Not all lenders offer this kind of loan, and the guidelines and eligibility factors may differ from regular home loans.
There are a whole bunch of baby boomers out there who own their own homes outright and are sitting on hundreds of thousands of dollars in equity. Using this scenario, they can make a real difference to their children’s lives. So if you are that special, trusted and deserving son or daughter with equally trusting and deserving parents, then you should ask them about this. What have you got to lose?
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