Buying a home can be notoriously expensive. Despite the fact that interest rates are currently at record lows, the government provides a lot of incentives to home buyers, and lenders are offering more attractive products so that they can grab a bigger share of the market, there are still those who cannot afford to purchase their first home. For some, getting their parents’ help is the only way they can put together enough funds for this purchase. If you own a home and have a child who’s struggling to buy theirs, then you can help. Below are a number of tips that will show you how to do this.
You can use a guarantor loan to help your child buy a home. There is a loan product called a guarantor loan where you, the parent, can act as a guarantor for your child’s mortgage using your property as security. With this type of loan, your child may be able to take out a loan with a deposit lower than the typical 20%. This may help them purchase a home sooner instead of spending years saving up for a deposit.
A guarantor loan can help your children avoid paying the LMI. Aside from helping your child own a home sooner, a guarantor loan can also help them avoid paying the Lender’s Mortgage Insurance (LMI). This type of insurance is often taken out by those applying for a home loan who have less than 20% saved for the deposit. The LMI will benefit the lender (and borrower) in that it covers any shortfall in the event of a forced sale, and this fee can be quite expensive, ranging from several thousands of dollars upwards.
If your child doesn’t have enough funds to make the 20% deposit, then they may be forced to take out a loan with an LMI. You can avoid this by acting as guarantor and guaranteeing either the entire deposit or just a portion of it.
Make sure your child can repay the loan. While a guarantor loan is a great way of helping your children purchase their own home, it can also put your own finances and your property at risk since you’re using the latter as a guarantee. Because of that, you have to make sure that your child can indeed afford the loan even before you sign up as their guarantor. This will reduce the stress and potential tension, both on your end and theirs, in the future.
In addition, make sure that your child can afford not only the loan itself but also the fees that come with it and the other costs of owning a home. These may include application fees, legal fees, as well as other charges that the lender might require, and the costs of renovating the property.
Knowing whether or not your child can afford the loan is important because, although you are helping them out, this can also have a negative impact on your personal credit situation if they default on the loan.
Minimising your risk as guarantor. There are a number of ways by which you can minimise your risk as guarantor. For one, keep the amount you will guarantee as minimal as possible. Naturally you want to provide the maximum guarantee that would be required to complete the transaction, but try to strike the balance between that and minimising your risk in case things don’t go as planned. It is just a practical consideration you have to make because the lender has the right to take legal action not only against the borrower, but also against you, the guarantor if something goes wrong.
If you own an investment property, it may also be a good idea to use this as security instead of your own place of residence.
You may also choose to act as a guarantor for only a portion of the loan, such as the deposit, instead of the entire loan. This one is ideal if your child only needs help with coming up with enough funds for the deposit. Check with the lender that this option is available.
All in all, a guarantor loan can be a great way of helping your child buy a home, either for them to live in or one for investment purposes. However it is also wise to remember that as with other financial arrangements, you have to make sure that your child has the ability and the sense of responsibility to do their part in repaying the loan. It is for this reason that it is also wise to seek legal and financial advice before taking this important step, so that you are able to provide a helping hand without putting yourself at risk.
Written by Dean English.