The lack of affordable housing in Australia’s capital cities is something that not only affects young Australians, but their families as well. Parents of millennials who are struggling to scrape together house deposits may be considering if it’s time to intervene and help their children into their own property.
If you own your home and are considering using the equity in this property to give your child a leg up into the property market by going guarantor on their loan, there are some important factors that should be taken into account.
What exactly does going guarantor entail?
Going guarantor on your child’s loan essentially means that the equity in your property will be put up as security for the loan instead of a cash deposit. This means that the need for your child to front up to the bank with a lump sum deposit is gone and lender’s mortgage insurance will also be waived if you put up 20 per cent or more of the property’s value.
It is important to distinguish between a guarantor and a co-signer on the mortgage. The main differences are that your income will not be taken into account for the approval of the loan, as your child will be required to service the loan on their own income, and the guarantee that binds you to the loan can be ended before the loan is repaid in full, once your child has built up their own equity.
What are the risks?
The risk for the guarantor in this process is that they are legally liable to pay back the amount signed on the guarantee should the borrower fail to meet their loan’s conditions. This means that if your child is no longer able to pay off their mortgage, depending on your circumstances, you may have to take out another mortgage or sell your home.
For this reason, a guarantor arrangement should not be entered into lightly. If you feel uncertain about your child’s ability to service their mortgage you should refrain from signing anything until this is resolved. It is also advisable to seek professional legal and financial advice before signing a guarantee.
What about my other children?
For parents with more than one child looking to enter the property market within a couple of years of each other, going guarantor for the first may diminish your ability to help out the second. It is unlikely a lender will allow you to be the guarantor on two loans at the same time as this is a highly risky position to be in.
It may be worth considering if there is another way you can help your children get into their own home that involves less risk. For example, you could contribute to their deposit using existing savings or allow them to live with you for a period while they save money for a deposit on their own.
Patricia Babalis is a personal finance writer for RateCity.com.au