Is a family guarantee right for you?

 

The property market is becoming harder to enter, especially in Sydney and Melbourne. Some parents may not be in a position to hand over cash for a deposit. In this case, a family guarantee could help buyers enter the property market sooner. Before taking the plunge, below are a few questions you should ask yourself to understand if a family guarantee is a right fit for you.

Am I financially fit to be a guarantor?

Before you jump into entering a family guarantee, you should consider your own financial position. Some lenders will hold the guarantor legally accountable to make certain the home loan is paid off. Many factors can impact repaying a loan such as loss of income.

Each lender has different criteria, with some banks making sure that the guarantor can service the full debt or the guaranteed portion. All lenders will ensure that the guarantor is in a strong financial position and that their property has enough equity. When considering becoming a guarantor on a loan, it’s recommended that you seek independent legal or financial advice.

Do the benefits outweigh the risks?

For first home buyers, saving for a deposit can be quite time-consuming. By becoming a guarantor of a home loan, it allows the buyer to enter the property market quicker.

Some banks may treat the loan as an 80 percent lend. Therefore, the borrower won’t have to pay lender’s mortgage insurance. Also, the borrower will not have to save up the full 20 percent deposit or in some cases no deposit at all.

While there are benefits of a family guarantee, it is important to consider the risks. The guarantor’s financial plans should be considered before entering the loan as the family guarantee will reduce the guarantor’s borrowing capacity. Additionally, as the bank will place a mortgage on the guarantor’s property, it is essential to evaluate certain factors that may put your property at risk.

Are there other ways I can help without being a guarantor?

If you do not want the risk of a family guarantee, you may opt to contribute gifted funds to the borrower’s deposit. However, with this option, there may be a few more hurdles that you have to get through. If the gifted funds are less than 20 percent of the property’s purchase price, it is highly likely that the lender will want to see evidence of genuine savings, usually 5 percent. However, some banks will accept rent as genuine savings. If you have been renting for a while, it shows your willingness to make repayments.