Is a family guarantee right for you?

Entering the property market is no easy feat for a first homebuyer, but even parents who aren’t prepared to hand over cash for a deposit may help by being a guarantor on a loan. Before taking the plunge, it’s crucial to be aware of the implications involved. Here are three questions to ask yourself to see if a family guarantee is right for you.

Am I financially fit to be a guarantor?

Being a guarantor generally means using the equity in your own property as security for your child to purchase their own property.

The very first thing you should be certain of is whether or not you are in a financially capable position to pay off the loan if the borrower finds that they can no longer do so. You need to be in a strong financial position and have enough equity in your property to be a guarantor.

There can be many disruptions to an income, such as loss of employment or a serious accident, and some types of guarantor loans hold the guarantor legally accountable to ensure the mortgage is paid off.

Do the benefits outweigh the risks?

Rising house prices are making it incredibly difficult to enter the housing market. You may want to help your child, but it’s important you don’t go into the transaction blindly.

It’s no secret that it can take a long time to save a deposit. By becoming a guarantor, you offer the borrower the chance to enter the property market much sooner. Lenders will treat the loan like an 80% lend, allowing the borrowers to avoid costly lender’s mortgage insurance.

Any time you borrow money or a bank places a mortgage over your property, there are definitely things that need to be taken into consideration. Being a guarantor is definitely not a first option, as there are certain factors that can put you or your property at risk. The guarantors ability to borrow will also be reduced after acting as a guarantor.

Depending on the structure of the guarantee, you could be liable should there be repayment defaults - either by taking over the repayment schedule or handing over a full repayment of the guaranteed portion. If you can’t make the repayments, the lender may sell the home used as security. If this is not enough, the lender may also require you to sell assets to meet the outstanding debt.

Are there other ways I can help without being a guarantor?

There are ways to minimise the risks. The most common is using a monetary gift or private loan – a common strategy is to borrow money against your property in your name, and then gift it to your child. Another way to reduce risk is to buy the property jointly with your child. This means your name is on the title and you have a percentage entitlement.

Contributing to a deposit allows you to provide assistance to the borrowers without needing to put yourself or your property at risk, but there are some extra hoops to jump through if a deposit includes gifted funds. With gifted funds, if the deposit is less than 20% of the property’s purchase price, then the banks will most likely want to see 5% genuine savings. There are a few lenders that will allow you to use rent as genuine savings. If you’ve been renting for a while, this could show that you have the propensity to make repayments.

When it comes to guaranteeing a home loan, it’s always sensible to speak to a professional and outline an exit strategy with the borrowers.

Contact your trusted Mortgage Broker today, they can provide you access to tailored home loan products and expert knowledge.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.