Having children is a life-long sentence. When they are babies you worry about them swallowing batteries and when they are teenagers you worry about them falling in with the wrong crowd. Once they are in their 20s and 30s, you worry about them being able to afford their own home.
First-home ownership among 18 to 39-year old's has dropped in Sydney and the figures are not much better in the Melbourne, Brisbane and Perth.
In a recent survey by the lawyers Slater and Gordon, 26% of Generation Y said they would need some help from their parents to get into their first home. That is great if Bank of Mum and Dad can afford it, but even if you are not in a position to help out your children with a bundle of cash, there is still a way you can give them a financial leg up. If you own your own home, you can help your children step on the property ladder by becoming a parental guarantor.
What is a Parental Guarantee?
It is when a parent uses the equity in their home as security against a loan taken out by their child. For example, if you have $500,000 equity in your home, you can put up part of that - say $100,000 to provide your child with additional security value, allowing them to borrow more of the purchase price of their new home.
What are the Benefits?
- Saving for a deposit can be hard, especially on top of paying rent. By freeing up the equity in your home as a deposit for your child, this means they can skip having to save for a deposit and can move into their own home faster.
- If you don't have a deposit of 20%, lenders require you to take out lenders' mortgage insurance (LMI), which covers them if you are unable to meet your repayments. A parental guarantee can potentially mean avoiding or reducing the cost of LMI.
- Once your child has built up the equity in their home, or paid off enough of their mortgage to cover your initial security, you can dissolve the agreement, although this may incur fees.
- So long as you have enough equity in your home, you can become a parental guarantor for loans for all of your children.
What are the Potential Risks?
- With all loans, there are risks involved. Your home is at risk should your children default on their loans.
- By agreeing to act as a parental guarantor, your ability to take on further loans for yourself or others will be diminished.
Frequently Asked Questions
What is a Parental Guarantee?
A Parental Guarantee is when a parent utilizes the equity in their home as security against a loan taken out by their child. This allows the child to borrow more of the purchase price of their new home, using part of the parent's equity as additional security value.
How does a Parental Guarantee benefit first-home buyers?
A Parental Guarantee can allow first-home buyers to skip the process of saving for a deposit, enabling them to move into their own home faster. It can also potentially mean avoiding or reducing the cost of lenders’ mortgage insurance (LMI), which is required if a deposit of 20% is not met.
Does becoming a Parental Guarantor cost anything?
As long as the child keeps up with their mortgage repayments, becoming a Parental Guarantor will not incur any costs. However, once the child has built up enough equity in their home, dissolving the agreement may incur fees.
Can one be a Parental Guarantor for multiple children?
Yes, as long as there is sufficient equity in the home, a parent can become a Parental Guarantor for loans for all of their children.
What are the risks involved in being a Parental Guarantor?
There are risks involved, including the potential loss of the home should the child default on their loans. Additionally, the ability to take on further loans for oneself or others may be diminished.
Should one rush into becoming a Parental Guarantor?
No, becoming a Parental Guarantor is a significant financial decision and should not be rushed into. It is crucial to seek advice from experts and work with trusted mortgage professionals to understand the implications fully.
Of course, as with all financial decisions, becoming a parental guarantor is not something that you should rush into without first speaking to the experts. But by doing your homework and working with your trusted mortgage professional, tapping into the equity in your home could help secure the financial future of your entire family.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.