Entering the property market is no easy feat for a first home buyer, but even parents who aren’t prepared to hand over cash for a deposit may help by being a guarantor on a loan. Before taking the plunge however, it’s crucial to be aware of the implications involved. Here are a couple of questions to ask yourself to see if a family guarantee is right for you.
Am I financially fit to be a guarantor?
There are different types of guarantees. A security guarantee is where the parent’s property is used as additional security to negate mortgage insurance. Normally there are two loans: an 80% loan over the purchase property and 20% over the parent’s home. In this instance, the child can service the loan from their own income.
A servicing guarantee is when the child’s income is not yet high enough to service the loan. In this case the parent’s income is also used to assist in servicing.
First thing you should be certain of is whether you are in a financially capable position to pay off the loan if the borrower finds that they can no longer do so. There can be many disruptions to an income, such as loss of employment or a serious accident, and some types of guarantor loans hold the guarantor legally accountable to ensure the mortgage is paid off. Make sure you seek independent legal and financial advice to ensure you are not putting your own home at risk.
Are there other ways I can help without being a guarantor?
If contributing to a deposit is an option, it allows you a little help without needing to put yourself or your property at risk, but there are some extra hoops to jump through if a deposit includes gifted funds.
With gifted funds, if the deposit is less than 20% of the property’s purchase price, then some banks may want to see five percent of genuine savings. Having said that, there are a few lenders that will allow you to use rent as genuine savings, so if you’ve been renting for a while, it shows that you have the propensity to make repayments and then the reduced (less than 20%) deposit may be used in that regard.
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