A parental guarantee allows your parents (or sometimes close family members) to use the equity in their own property as security for your home loan.
It’s a way of helping you avoid the need for a large deposit or additional costs like Lenders Mortgage Insurance (LMI).
Eligibility for Borrowers
- You must be looking to purchase a new home for yourself.
- Must be a First Home Buyer purchasing a residential property that they intend to live in. (Family guarantees are not available for investment properties.)
- Home loan repayment type must be, Principal and Interest (P&I).
Eligibility for the Guarantor
- Must be a parent, step parent, de facto to the parent or former legal guardian of one of the borrowers.
- Your parents must own their property and have sufficient equity, to be able to release some as a guarantor.
- Must own the property used as a guarantee, and all security holders must become guarantors (must match title deed).
Benefits, at a glance
Access to the Property Market Sooner: You can buy without waiting years, to save a large deposit.
Cost Savings: Avoiding Lenders Mortgage Insurance (LMI) and potentially qualify for a better interest rate, with your financial institution.
Leverage Family Equity: Parents can be in a position to support their immediate family, without providing cash or gifting money.
Key Attributes of a Parental Guarantee
Deposit Assistance
If you don’t have the required deposit (often 20% of the property’s value), the parental guarantee acts as extra security, reducing the loan-to-value ratio (LVR) and helping you meet the lender’s requirements.
Reduced or No LMI
By reducing the LVR below 80% with a parental guarantee, you may avoid LMI, which can save you tens of thousands of dollars depending on your loan size.
Partial vs. Full Guarantee
- A Partial Guarantee: Parents guarantee only a portion of the loan (e.g., 20% of the property’s value). This minimizes their risk.
- A Full Guarantee: Parents back the entire loan amount, which is less common and riskier for them.
Serviceability
The borrower remains liable to repay the loan in full, even the portion guaranteed by the parent.
The financial institution or lender will assess the guarantor’s financial position, to ensure they can provide the guarantee, without compromising their own financial position and stability.
No Transfer of Ownership
The parental guarantee doesn’t mean your parents are buying the house or owning part of it. They are simply using their property’s equity to secure your loan.
Flexibility to Release the Guarantee
Once you’ve paid off a portion of your loan and or the Loan to Value Ratio (LVR) is below 80%, you can usually remove the parental guarantee, releasing your parents from any further obligation.
Risks for the Guarantor
Liability: If the borrower can’t repay their loan, the lender could pursue the equity in your property.
Limited Borrowing Ability: Guaranteeing with your loan could impact their ability to borrow in the future, until that position is released from the loan.
Relationship Strain: Not commonly addressed, but financial agreements can add pressure between both parties, if expectations aren’t clear.
Other Important Considerations for Both Parties
Legal Advice: Parents are typically required to seek independent legal advice to fully understand their responsibilities, when becoming a Parental Guarantee.
Serviceability: The financial position of both borrower and guarantor must also be taken into account when considering the Parental Guarantee. Both parties must be confident in their financial situations to move forward with the guarantee.
Exit Strategy: Essential for all borrowers, to have a plan to remove the guarantee as soon as possible to minimize risks for your parents.
Other Costs: Your parents may incur costs, like a valuation on their property or any direct legal fees.
Remember this is not financial advice and we are not financial professionals, the content on this website should not be construed as professional financial advice. Before making any financial decisions or taking any actions based on the information presented on this website, we strongly recommend that you consult with a qualified and licensed financial advisor