Parental guarantees. What are they? Why would we use one? What are the pros and cons? What are the risks associated? So let’s look at it.
Basically, what is it? It’s a parental Guarantee forming additional security over the home that you’re about to purchase, so, Mum or Dad or both, will offer their home as security to the banks so that they can get approval for the home that you’re about to purchase, right, so it gives the banks comfort and you’re able to get into your property sooner rather than later. So you might have a low deposit that doesn’t enable you to get into the market that you want to, or your income might be low so your servicing doesn’t meet the criteria, that’s where a parental guarantor or parental guarantee can help you in that instance. Now, the positives, as I mentioned, it gets you into the property market sooner rather than later so you’re leveraging your money sooner, so that if there’s any growth in the next 12 months, two years, three years, you can take advantage of that as opposed to saving for another two or three years to get yourself into the market, by that time the property price may have gone up for what you wanted to buy some three years back.
There’s no lender’s mortgage insurance, so, you might have some funds to put into the deal, but you might not have any, right. Because your parents are offering security over that loan, the banks will waive the lender’s mortgage insurance because they know that if anything happens to your loan and you stop repaying it, they can come and grab mum and dad’s security themselves to cover their risk profile, right. So you’re leveraging growth, you’re not paying LMI, you can get into the property market sooner. They’re the main positives. What are the negatives or the things to look out for when you’re going through such a process?
Number one, your parents are at risk. That’s all there is to say about that because the property security that they have, is now given to the banks, okay, so you want to make sure that you’re repaying that mortgage every fortnight or every month, so that it doesn’t put your mum and dad at jeopardy in that sense. They’re going to remain on the loan until you get your loan to value ratio in a comfortable position where you can hold the loan on your own, the value is safe from the bank’s perspective, and you don’t have to pay any lenders mortgage insurance to release them from that mortgage, okay. so just remember that they’ll be there potentially for the life of the loan if you’re not paying down any of the loan and the value of the property doesn’t go up in value, okay. So all in all there’s some pros and cons of any decision that we make but I think generally speaking the parental guarantee is a good one, you just need to make sure that you have a legal document drawn up between Mum and Dad and yourself, even though you are family, we need to put the right steps in place to ensure that we’re both covered and we’re both on the same terms going forward, but it’s a great way to get yourself into the market sooner rather than later, especially in times where property prices for first home buyers are becoming very unaffordable. So, hope that helps and good luck with your property search.