Guarantor Home Loan: Can Parental Guarantee Help You Buy a House?
Ever heard of a guarantor home loan? If you haven’t and you’re planning on buying your first home, then this article is for you. Now, picture this scenario.
You’ve been sticking to your budget; you’ve cut back on all non-essentials and you’ve been diligently saving for years…but it still feels like you’ll never be able to save that 20% deposit for a home loan. With a booming Gold Coast property market and skyrocketing interest rates, the goal of owning a home may feel like it’s drifting further and further away. As a result, many prospective first home buyers are now looking to their family for help. How can parents help first home buyers get a mortgage? A guarantor home loan could be the solution.
Gold Coast Property Prices Booming
Property prices on the Gold Coast have boomed recently, thanks to a surge in interstate and overseas migration. In 2021, the Queensland property market was one of the strongest performing in the country, with increases of over 30% in multiple locations. While this phenomenal growth has since slowed, we’re still seeing property prices increase. In
September 2019, the Gold Coast’s median house price was $642,000. By February 2023, it was $945,000. That’s an increase of 47.2% in less than 3.5 years! For first home buyers trying to save a 20% deposit, this increase in property prices has moved the bar of homeownership about $60,000 higher.
Add to this the significant increases in rent costs and grocery bills across the country, and it’s easy to see why it now takes 10 years on average to save a 20% deposit. But with a guarantor mortgage, you could buy your first home without having to wait so long.
Could a Guarantor Home Loan Help You Buy Your First Property?
It’s no surprise, then, that many first home buyers are looking for guarantor home loans. In fact, the ‘Bank of Mum and Dad’ is now recognised as one of the top 10 lenders in Australia, with loans totaling about $35 billion (for perspective, that’s more than the Bank of Queensland)! Back in 2010, only about 12% of first home buyers were applying for guarantor loans. By 2017, that figure had increased to 60%.
And data shows that guarantor loans have been instrumental in helping a growing number of first home buyers. The Australian Housing and Urban Research Institute (AHURI) has stated that borrowers with a home loan guarantor are twice as likely to enter the property market compared to those without this support.
What Is a Guarantor Home Loan?
A guarantor home loan is one of the most common ways parents can help their kids get a foot on the property ladder. When providing a parental guarantee, your parents basically use the equity in their own property as collateral for your home loan. How does this work?
Imagine you’ve saved up a 10% deposit for a home loan. But to avoid paying Lenders Mortgage Insurance (LMI), you need a minimum of 20%. Instead of making you wait until you’ve saved the extra funds, your parents offer the additional 10% from their equity as a form of security. They don’t have to physically hand over the cash, and you qualify for a home loan without paying LMI. Sounds like a winning situation!
What Else Should You Know About Parental Guarantees?
Keep in mind though, when your parents act as a home loan guarantor, they become liable if you default on your repayments. In a worst-case scenario, they could lose their home to repay your debt. That’s why a guarantor mortgage arrangement isn’t something to take lightly.
As with any major financial decision, it’s important to seek expert advice before weighing up all the relevant pros and cons. If you’re thinking about asking your parents to act as a home loan guarantor, why not start by contacting the experienced brokers at PLS for some free advice?
Besides Guarantor Loans, How Else Can Parents Help?
After evaluating all that’s involved, your parents may decide that they’re not comfortable acting as your home loan guarantor. If that’s the case, there are still plenty of other ways they can help.
From offering a financial gift or a cash loan to letting you move back in and live rent-free for a while, parents can provide valuable assistance to their first home buyer children.
1. Receiving a financial gift
Instead of a parental guarantee, a financial gift from your parents can be used to top up a deposit for a home loan. However, keep in mind that most lenders will also want to see a history of “genuine savings” as part of your home loan application.
If you have no savings and then receive a large cash deposit into your account, the lender won’t view this as “genuine savings”. You’ll either need to show a history of your own savings (at least 3 months) in addition to the cash gift or, you’ll need to hold the cash gift in your bank account (without spending any of it!) for a minimum of 3 months.
2. Accepting a cash loan
Another alternative to a guarantor home loan is for your parents to offer you a cash loan. Keep in mind that, with a cash loan, you’ll need to manage repayments to your mortgage lender and your parents simultaneously (which could place you under added financial stress).
It’s also important to know that a lender won’t view a cash loan as a form of “genuine savings”. For these reasons, careful financial management is essential when accepting a cash loan from your parents.
3. Letting you live with them rent-free
Rather than act as a parental guarantee or provide you with cash, your parents may feel more comfortable with having you move back home for a while. This might not be your preferred option (moving back in with the parents is never easy!) but living rent-free can be a viable alternative to a guarantor mortgage.
If you’ve been paying $500 a week in rent, you could potentially save an extra $26,000 in just 12 months of rent-free living. That represents a significant boost to your savings in a relatively short space of time. This option also allows your parents to provide valuable assistance with minimal financial risk to their own assets. This makes rent-free living a beneficial arrangement for both parties.
4. Buying a house with your parents
Instead of a guarantor home loan, you could consider buying a house in partnership with your parents. In this scenario, both you and your parents contribute funds to purchase a property and you are all registered as co-owners on the property title.
This would allow you to buy a property much sooner, and it would act as a form of investment for your parents. If you’re considering co-ownership with your parents, it’s important to work through and agree on all the details in advance. For example:
Who will live in the house?
Who is responsible for ongoing costs (council rates, maintenance, insurance, etc.)?
Will the person who lives in the house pay a form of rent?
What will happen if one party wants to sell their share in the property?
A detailed and signed agreement is essential when buying a property in partnership with your parents, as it will help prevent misunderstandings down the track.
These are just some of the alternate ways that parents can assist their children with buying a property, without signing on to a guarantor home loan.
What Other Help Is Available for First Home Buyers?
There are also various government and lender initiatives available that have been designed to assist first home buyers. For borrowers who don’t have a parental guarantee, these programs could be a viable alternative to help you secure a mortgage faster. These include the:
- First Home Loan Deposit Scheme
- Queensland First Home Concession
- Queensland First Home Owners’ Grant
- Parent Assist Home Loans
To find out more about any of these initiatives, talk to a mortgage broker today.
Talk to a Broker About a Guarantor Mortgage
A home loan guarantor could help you buy your first home sooner, without having to pay Lenders Mortgage Insurance. To find out more, book a free appointment with the friendly team at Professional Lending Solutions. Or give Phil a call on Ph: 0421 934 033 or Ph: 07 5597 6049.