Thursday 15 December 2016
I’m sure you’ve noticed that house prices have been high for some time now, and they aren’t likely to come down any time soon. And when the market is this competitive, parents often take it upon themselves to help their children get a foot on the property ladder.
If you’re one of them, you might be letting your kids stay at home, rent-free while they save for a deposit. But lately, another option has been increasingly popular – parents going guarantor on their kids’ home loans.
When you go guarantor for your kids, it means they can use the equity built up in your home as extra security against their loan, and therefore pay less. According to NAB, the number of borrowers choosing this method rose from 6.7% in 2010, to 8% in 2016.
But as popular as it’s becoming, this is a strategy that requires a big commitment and can be pretty risky for parents. In this blog, I’ve broken down the advantages and disadvantages of going guarantor, along with some of my top tips for making it work.
ABS figures put the average first home loan amount at $335,000. That means if young Aussies want to keep their LVR below 80% and avoid paying lender’s mortgage insurance, they’d have to save a hefty deposit of at least $67,000. And that’s not even factoring in the other buying costs like stamp duty, and conveyancer and valuation fees. No easy feat.
That’s where parents as guarantors come in. Not only can it help first home buyers to avoid paying LMI, but it can also mean giving them access to some of the best deals on the market, which often require borrowers to have an LVR of 80% or less.
Although having a parent as a guarantor is great for young borrowers, it can be risky for the parents. One of the main risks is that if your child can’t make their monthly repayments, you can be liable instead – at least for the portion of the loan you guaranteed.
If your child defaults on the loan, the lender will often sell your child’s home first in order to discharge the mortgage. But if there’s a shortfall, it may be your home up on the chopping block next.
This is a considerable risk, so you should think long and hard before agreeing to go guarantor for your kids. Ask yourself honestly whether you trust your children to be financially responsible, and make sure you’re in a position where your savings can comfortably cover any problems that come up.
Are your kids looking for a home loan to get into the property market? You can compare first home loans to find a deal yourself!Home loan tips