With house prices continuing to rise, more than half of Australian parents (around 53%) are thinking about helping their kids buy a home of their own by going guarantor, according to a recent survey of 1000 Australians.
Colloquially known as ‘the bank of mum and dad’, guaranteeing a loan for your adult children can definitely help them get their foot on the property ladder sooner. But it’s not necessarily a straightforward process and it does have its risks.
Why are more young people seeking help from their parents?
The simple answer is because saving for a home loan deposit has become increasingly difficult due to rapidly rising house prices. As the prices increase, so does the amount of deposit required and this can push many out of the ball park.
Even when house prices are more stable, saving the deposit – ideally 20% of the purchase price – is the greatest hurdle for most first homebuyers, especially if they are renting. While many have the salary required to comfortably afford their mortgage repayments – especially with today’s historically low interest rates – they just can’t get over that first major hurdle. This is where enlisting the help of a guarantor may help.
By helping adult kids as a guarantor, you don’t actually have to give them any money. Instead, you can use the equity built up in your home to be used as additional security for their loan. The primary security for the loan will be the property they purchase but the lender will also take a mortgage over your property as the guarantor. This mortgage will not support the loan directly but will be used to support a guarantee from you.
A guarantor loan allows a buyer to borrow up to 100% of the purchase price, which would definitely help those who can obtain loan approval but don’t have the necessary deposit saved. However, guaranteeing a loan does have risks because as a guarantor, you are liable for the loan if your child defaults on their loan. This means you would become responsible for paying off their mortgage. This is why most guarantors are immediate family members of the home buyer (normally the parents) as it demands a lot of trust.
In these unusual times where young people have access to incredible home loan deals and could afford mortgage repayments, it seems ironic that so many are being priced out of the market due to increasing house prices. If you have ample equity in your home and are interested in helping your adult children secure a home of their own and get off the renting treadmill, going guarantor for them may be worth considering.
Naturally everyone’s circumstances are different so it’s always best to seek expert advice before entering into a guarantor arrangement and to ensure the loan is structured to suit your unique needs.