Over the past 3 years, Blue Key Finance has seen an upward trend in the use of parents helping their children enter the property market by becoming a guarantor. The guarantor option today is very different to what it was back in the 1980’s. We feel it best to inform all our readers why it’s become a popular method in getting more people into the property market.
Purchase the property you want rather than having to settle for a cheaper alternative
Still be entitled to normal interest rates and the normal suite of home loan products
Avoid Lender’s Mortgage Insurance (LMI) because your parents will put up a limited
guarantee amount enough to bring your ‘loan to value ratio’ (LVR) down to 80%
Your parent’s won’t need to hand over cash to you nor will they need to make
repayments on their limited guarantee amount while they’re acting as guarantors
After settlement, your parents can discharge their responsibility as a guarantor, but, at the time of discharge, if your LVR in your own right is above 80% then you will have to pay the required LMI premium. We suggest wait until your property achieves the 20% equity first and this can be done by it appreciating in value over time and you continuing to make extra repayments. We’ve had client’s achieve this in as little as 2 years.
Example of a guarantor providing security support
A first home buyer is seeking to borrow $315,000 to purchase a property valued at $300,000 (as she has little deposit, so must be able to cover the purchase price, stamp duty, and other expenses etc.). The Loan to value ratio (LVR) for this example is 105%, which is outside of
acceptable security limits for any bank. In order to help this first home buyer obtain her loan, her parents have agreed to allow the bank to take a mortgage over their property in order to provide a limited guarantee. The limited guarantee provided is for $93,750 as this will bring their child’s LVR down to 80%. That is, loan / total security offered, or $315,000 / $393,750 = 80% LVR).
Bear in mind though, a limited guarantee only reduces the LVR so as to avoid LMI, and does not reduce the loan amount requested from the first home buyer example above. The repayments will still be based on a $315,000 home loan amount. Secondly, as long as your parents combined limited guarantee amount and their existing mortgage amount is < 80% on their own property’s value then a guarantor option is still a viable option.
Things you need to know
With guarantees, if down the track you default on your home loan, the bank can then demand repayments be made from your parents until you get back up on your feet again.
We always look into the ability for parents wanting to act as a guarantor, that they are able to discharge their responsibility within a couple of years after initial settlement of your loan.
If your parents do not feel comfortable in being a guarantor than they can take out a second registered mortgage on their property and gift you those funds but they will then be responsible for making repayments on their second registered mortgage from day one.