How parents can help their kids buy a home
Loan guarantees are possibly the fastest way to help young, first-home buyers enter the market.
In most cases, parents will mortgage a portion of their own home to help their children meet property prices that would otherwise be beyond their reach.
It’s a popular strategy when a market dips and buyers want to move quickly to take advantage of the opportunity.
A guarantee is the only way to obtain a 100 per cent mortgage against a property, but it can also be limited to a percentage of the loan being requested.
Some banks will offer up to 105 per cent of the value of a property to cover associated expenses, such as stamp duty, legal fees and any renovation. Of course, this extra money must be guaranteed, too.
A guarantor loan is restricted to parental support only by most lenders but can be supplied to purchase a first home, to build a first home or for an investment in a first property.
Most lenders will want to be satisfied with the buyer’s savings history and, on most occasions, would prefer to see some level of deposit accumulated.
Parents will be asked to put up their own property as collateral in any deal. This is known as a “security guarantee”. If a mortgage already exists on their property, then a lender would normally insist on a second mortgage being arranged.
A second method is a “security and income guarantee”. This involves parents supplementing mortgage repayments with their own income. This is a common arrangement for those helping their children who study or earn a low wage.
Over the time of the loan, a guarantor can be released from their obligation when the lender is satisfied the loan-to-value level has been sufficiently reduced. However, the guarantor has to apply for this release as lenders will not build in an automatic trigger.
Loan guarantees are not without risk and you should seek your own professional financial advice before making any move. Insurances such as life, total and permanent disability, and/or income protection insurance are worth considerating when so much is at stake.
If mortgage repayments are not made over a 180-day period, a lender may start foreclosure proceedings. The good news, at least for the parents, is that theirs will not be the first property sold.
However, they will have to make good on any resulting financial shortfall up to the limit of the guarantee.
Benefits of a loan guarantee:
- Faster entry to market.
- Maximise the amount to be borrowed, and therefore the quality of property to be purchased.
- Avoids a deposit requirement in most scenarios.
- The guarantor can leverage equity in their property rather than find cash to assist their children
- Some banks will offer a reduced interest rate, and allow consolidation of debt under the one loan.
- Reduction in Lenders Mortgage Insurance because the risk is reduced by the level of the guarantee.
This article is of a general nature. Readers should seek professional advice.