Going guarantor for your children, yes or no?
With the continued rising costs of residential property across the country, many young Australians have been priced out of the property market. This has been exacerbated by the recent RBA rate rises [June 2022], inflationary pressures on daily living expenses and building costs as well as rising rents. The ability to save towards home ownership has become more onerous, particularly for first home buyers.
If your adult children are at the stage where they’re looking to enter the property market, it will translate to them biting the bullet and using whatever savings they have available as a deposit (say 5-10%) and paying a hefty price on mortgage insurance premiums to the lender.
The cost of mortgage insurance is usually 2% to 4.5% of the loan amount depending on the home loan value ratio and could translate to thousands of dollars added to their mortgage, essentially insuring the lender against them defaulting.
Going guarantor on a home loan for your children can be the answer to earlier home ownership for them.
Who can go guarantor on a home loan?
Unknown to many doctors, there are lenders who will lend to clients working within the medical profession, up to 90-95% of their home purchase without requiring lender mortgage insurance.
In addition, there are lending products available by way of a family security guarantee that would allow your kids to borrow up to 100% of their purchase as well as the associated stamp duty and registrations costs.
A lender will consider a family member going guarantor who are parents, grandparents, guardians or siblings.
What does going guarantor mean?
It is difficult to save 20% deposit on a home purchase as well as stamp duty costs and this is where doctors becoming a security guarantee for their children can help.
Going guarantor on a home loan effectively allows you to act as guarantor to secure what your kids are missing in their deposit, so they have a bit more borrowing power. It effectively reduces their loan value ratio to 80% or under thereby avoiding the cost of lender’s mortgage insurance as an additional charge on top of their mortgage.
How does going guarantor on a home loan for your kids work?
At the end of the day, it will depend on your own financial situation and whether or not you can afford it. As a way of payment, a guarantor can choose to use Cash.
Typically, this will be locked away on a term deposit by the lender which will allow them to still earn interest. After the initial term investment, the Term Deposit will continue to roll over until the required Loan to Value Ratio of 80% (LVR) is achieved by the borrower, and you as the guarantee can be released.
You do not have to wait until the full loan is repaid to the bank. However, for the borrower to reach 80% loan value ratio (LVR) this can take a few years and will also depend on the property valuation in the future (things to take into consideration are market decline etc).
Doctors going guarantor will be required to seek independent legal advice and lenders may require a legal certificate before offering to guarantee a loan.
Can you go guarantor on a home loan if you already have a mortgage?
Yes, if cash isn’t an option for you, you can use equity in your current home or investment property which will allow you to go guarantor for your kids or dependents.
The benefit of using equity is that you do not have to lock away any cash on term deposit. You may have an existing mortgage on your home or investment property already but as long as there is sufficient equity, the borrower’s lender will be able to take on a second mortgage to secure the family security guarantee.
Note that the onus is on the borrower to be able to pay for the full loan amount borrowed.
Going guarantor on a home loan in this instance, is a security guarantor only and your personal incomes are not being used to calculate or assist with the borrowing capacity of your children [the borrower].
What are the risks of being a guarantor on a home loan?
Ultimately, every parent wishes to be able to extend a helping hand to their kids if it is a possibility but it is a big decision and one that no one should take lightly.
When thinking about going guarantor on a home loan, consider the following:
- Ensure you are confident in the borrower’s ability to pay their home loan and where possible, encourage making additional repayments to the mortgage to be able to release the guarantee as early as possible.
- Guarantors are liable for the amount they guarantee, effectively promising to pay the lender that amount if the borrower cannot pay their loan and defaults.
If using a Term Deposit as security, the whole deposit amount could be forfeited depending on the portion the borrower cannot repay. If you choose to use your home’s equity as security and don’t have cash to pay the bank, you risk your home being sold to cover it.
- While acting as guarantor, your ability to borrow may be reduced.
In summary, going guarantor on a home loan could be the stepping stone required for your children to finally buy their home rather than constantly chasing their tail to save for a deposit.
However, you need to understand the benefits and risks, and ensure you are confident about their financial situation (and yours) before making the plunge.
If you would like to learn more or discuss your personal situation with a DPM Lending Consultant who specialise in the medical sector, book an appointment online today.
Disclaimer: This information has been provided by DPM Lending Pty Ltd ACL number 374850 and is general in nature so it may not be right for your personal circumstances. DPM Financial Services recommends you obtain advice concerning specific matters before making a decision.