Parental Guarantees

Oct 26

Three things you need to know about parental guarantees

When it comes to buying a home, I’ve had several clients who have overlooked the potential of a parental guarantee and have since been thankful we walked them through the process.

A parental guarantee is where the borrower’s parent/s (or another family member) provide a guarantee to the bank against a property to secure a percentage of their family member’s loan.

A parental guarantee can help you avoid tens of thousands of dollars in mortgage lenders insurance, and/or can increase your borrowing power and/or reduce the deposit expected by the bank before a loan is granted.

Here are my top three things-they-never-taught-you-in-school about parental guarantees:

Parental guarantees are not just for first home buyers. Yes, parental guarantees are popular with first home buyers wanting to avoid mortgage insurance, increase their borrowing power or reduce their deposit. However, these sorts of arrangements can be used by anyone with parents willing and able to act as a guarantor. I have found parental guarantees particularly useful for people starting again at a different stage in life (people coming out of a divorce, for example) in which they do not have sufficient savings or equity in previous properties to get a loan.
Parental guarantees are a great opportunity for young people with strong incomes. Typically, these guarantees are used by young people who may have saved some deposit or none. For those couples with strong incomes who secure a parental guarantee, they may be able to reduce their deposit to zero or be able to borrow 100% of the purchase price plus costs (so around 105% of the purchase price).
Use a home loan expert to navigate parental guarantees. Parental guarantees can differ greatly between banks. I’ve known of some banks telling clients they require 100% of the purchase price to be held against the parents’ property, whereas another bank has told the same client only 20% of the purchase price would be held against the parental property. Meanwhile, some banks are more aggressive against the parents’ house if something goes wrong, such as defaults, while other banks are more flexible if there is a change in circumstances for the parents (for example if the parents downsize or sell with the intention of buying down the track). There are also some lenders that allow the parents mortgage to stay in place with their current lender.

Is a parental guarantee right for you?

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