Have you struggled to save a deposit for your home?

Getting help from your parents to guarantee your loan is by far the most effective way of borrowing 100% of the purchase price!

However, there are many things to consider when deciding whether this arrangement is appropriate for both you and your potential guarantor/s.

To find out more about parent guarantor loans, please read on.

How much can I borrow?

With the support of your parent’s guarantee, you will be able to borrow 100% of the purchase price.

This means that you do not need to evidence any genuine savings and can fund the entire purchase price through the bank loan.

Additionally, you will not have to pay Lenders Mortgage Insurance (LMI) which can amount to thousands and thousands of dollars!

What is a parental guarantee?

A parental guarantee is where the guarantors are the parents of the borrower.

As guarantors, they provide a guarantee to the bank that if their child defaults or fails to pay back the loan amount, they will cover any short fall or loss that the bank may incur.

Typically, this arrangement is by way of a security or serviceability guarantee, however in most cases it is a security guarantee.

This means that the guarantors will either offer their property as security for their son / daughter’s loan or offer a portion of their surplus income to pay towards servicing the loan amount.

How does a parent guarantee work?

Generally, the child will not have a sufficient deposit to meet the genuine savings requirement. As a result, their parent’s will be required to offer their home as security.

This helps protect the bank against the risk of lending 100% of the purchase price.

For example, Susie and Tim want to buy a property that is valued at $550,000. Susie works as a nurse, receiving an income of approximately $52,000 a year. Her husband Tim is a plumber who earns $73,000 per annum.

Susie and Tim are recently married. Neither of them have saved the 5% deposit ($27,500) that is required to meet the genuine savings requirements of most banks.

Susie’s mother and father have paid off their family home.

They agree to provide their home to the banks, as security for their daughter’s bank loan.

This will enable Susie and Tim to borrow the total $550,000 needed to complete the purchase.

The bank now has the parent’s home as additional security for the loan, as well as the property that Susie and Tim are purchasing.

This means that if Susie and Tim default on their loan, the bank can first recover the debt from them, either through payment or by selling their home. If there is still any short fall that is not covered, the bank can then turn to Susie’s parent’s to cover the debt.

To get help applying for a guarantor loan please call us on 1300 399 056 or enquire online.

Our specialist mortgage brokers know which banks will look favourably upon your situation and are most likely to approve your loan. Speak to us today!

Why do lenders prefer parent guarantors?

Lenders prefer the parents of a borrower to be a guarantor for the following reasons:

• They have the closest relationship with the borrowers.
• They know if their son or daughter is good with money and are unlikely to guarantee the loan if they doubt their child’s financial capacity.
• They know the nature of the relationship with their child and would not guarantee the home loan if they believe that the relationship might break down.
• The parents are usually in a much stronger financial position.

If you know that your child will not be able to service the loan, or has had a history of bad credit, defaults or difficulty making timely repayments, then it is best not to enter into this arrangement.

The risk that the guarantee will be exercised is exacerbated in these circumstances. If you have any doubts, it is best to speak to a financial and legal expert who can better advise you.

Are parental guarantees common?

Yes! In fact, there has been a steady increase in the number of guarantor loan applications over the past few years.

Young couples and families often struggle to save for a deposit, especially with the rising cost of housing.

With a guarantor home loan, there are no up front cost to the guarantor. The risk of the arrangement is also minimised if the borrower is financially responsible.

Where the borrowers financial situation is unstable, the bank is most likely to decline the guarantor loan application.

It is important to consider this before lodging a parental guarantee application.

Speak to a parent guarantor expert!

We are the experts in parent guarantees and know which banks offer the best loans on the market! Please call us on 1300 399 056 or enquire online and one of our mortgage brokers will contact you to discuss which loans may be available to you.