While most of us are staying home and spending less due to Covid-19, saving for a deposit remains one of the biggest challenges for first home buyers.
This is when parental guarantee is being used for this purpose and both children and parents appear to realise the benefits.
What is parental guarantee?
A parental guarantee is when parents offer a property they own as extra security to cover the difference between your current savings and 80% of the value of your future home.
Don’t associate this strategy with affordability, as it is completely a different issue. This is because parental guarantee only tackles a savings or equity deficit. It is not entered into frivolously as it is provided by a mortgage. But it can be discharged once the home has enough equity to be refinanced out or stand on its own.
The following can be provided by a good guarantee structure – as they are not all similar.
- Restrict the guarantors’ exposure to just this gap and negligible expenses
- Not obligate the guarantors to refinance or readjust their finances
- Not obligate the guarantors to provide too much evidence of income. However, guarantors are protected to make sure there is a way for them to end the guarantee without losing their property in case you are unable to continue servicing the loan. Since this is a possible risk for guarantors, it is best to consider other ways like paying it off, or superannuation, or other assets than the family residence.
- In the worst case scenario, let the guarantors make the payments on the limited guarantee part to end it prior to a discussion of the sale of any of their assets.
- One guarantee will let first home buyers merge a minor debt – making repayments more affordable in the long run – and free some cash out for home upgrades; only if the guarantors agree.
Those who are buying a home to live in who already own an investment can also avail of this type of investment. However, there isn’t sufficient equity in the home to support the home buy.
To emphasize, these are not designed to put your parent’s home at risk to help you in building your portfolio, but a rational strategy can be used in situations where it’s practical to use a guarantee, and for many borrowers it may not be easy to save and pay rent.
- Hasten your entry into the property market
- Doesn’t require you to save a deposit (though if you have a deposit saved you can end the guarantee quicker)
- Access to lower interest rates than if you went in with a small deposit.
- You can complete upgrades on a low-priced property (which could possibly increase its value)
- Both parents and borrowers are bluntly warned that it’s a mortgage and must be regarded seriously.
- If you cease making payments, you are putting your own and your parents’ property at risk
- Establishing it involves certain complexity and time – but not too demanding.
- Lenders generally require parents to get legal advice, and this is normally done after it is too late for you to cancel the home purchase.
In documents, it will appear to be one loan in most situations, you will be responsible for all repayments and get all the statements. In short, you are wholly responsible.
In addition, the bank will not start the discharge of the second security. This is important to remember and it is recommended that you keep yourself updated on the market.
In most situations, the market will do most of the work in increasing your equity while you keep on making repayments, until such time you can a valuation done on your home, find out your loan has reached 80% of the new value and apply to free the guarantee.
These have no specific time frame but based on experience the time frame is often roughly five years/
With regards to the approval process, get ready to respond to additional questions relating to your income stability due to COVID-19 and any effect it might have had to your financial situation. Borrowers are required to have a good credit history, but on the positive side, where line by line expense analysis is happening for the majority of us we are experiencing lower expenses and this creates a great opportunity to both save and illustrate our capacity to finance our future new home.