Parents who would like to give their children an easier entry into the property market can use their homes as security with lenders so that their children won’t have to pay a deposit. By acting as guarantors, parents are able to help their children to borrow 100% of the property purchase price or even up to 110% to cover associated costs such as stamp duty
, solicitor fees and bank fees, all without a deposit or savings. This scenario is ideal for those with a consistent income and borrowing capacity but without the deposit. If their parents act as guarantor, children living out of home might be able to purchase a property and pay a similar amount in mortgage repayments
as what they would otherwise be paying in rent.
When a parent provides their property as security for 20% of the purchase price, the child can also avoid paying Lenders’ Mortgage Insurance (LMI) which can save them thousands. Over the years, as the loan is paid down and the value of the property rises, the children can apply to remove their parents from being guarantors on the loan. There may be discharge fees for this process.
Parents must acknowledge that acting as a guarantor is more than just signing a document and it comes with a potential downside. In a worst case scenario, if the child were to lose their job, have a relationship breakdown or if they were injured for a period of time and couldn’t manage the mortgage repayments, the bank would sell their property first and if there was any shortfall the lender could then make a demand on the guarantors to cover the loss. The guarantor is not liable for any scheduled monthly repayment amounts. All guarantors should seek independent legal advice before signing the guarantee documents.
For parents wanting to help their children to purchase a property without acting as guarantors, they can lend the children the money or it can be given as a gift. It is important for parents passing over money to children to make clear whether the money is a loan or a gift and if it is a loan, a formal loan agreement should be drawn up.
If you would like to speak further about acting as a guarantor or having a guarantor, contact your Mortgage Broker or Financial Planner today.
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