How Does A Guarantor Home Loan Work?
With the rising property prices putting homeownership out of reach of many millennials, first home buyers struggling to get a foot in the door and enter the property market are seeking the help of their parents to act as guarantors on their home loans.
Also known as a Family Pledge, in such cases, the parents either agree to offer a security guarantee or an income guarantee.
Security guarantee is when the parents offer to put up their place of residence as collateral to secure a new place for their adult offspring. They may own the place outright or still be paying off a home loan on their property, using the equity in their home to help their kids with the extra security. The parents’ property acts as the deposit, and because the Lender will lend against the total of the two properties, the applicant could, therefore, borrow up to 100% of their property value.
Most parents are only too happy to see their kids settle in life, and giving them a helping hand into the property market seems like a natural progression. Lenders, however, may prefer to lend against an investment property, opposed to a guarantor’s home as this reduces the risk to the guarantor.
Income guarantee, on the other hand, enables the applicant who cannot service the loan on their own to get financial backing from their parents. The parents or family members could be added to the loan as a guarantor. This, however, does not benefit the guarantor and it is recommended instead to go on the loan as a joint applicant, give your child a lump-sum cash gift or a loan under a family financial agreement.
Guarantor loans can also be useful for both home buyers and investors who can repay the loan but don’t have sufficient funds to meet both the required deposit and the associated costs.
Sometimes, the Lender may allow the parents as the guarantor to nominate the specific amount that can be used as a guarantee, rather than a traditional open guarantee for the entire amount.
Whichever option you decide to go with, a home loan can be a lifelong commitment and relationships could turn sour or family dynamics may change. That’s why any such decisions should be carefully considered with lending arrangements always documented for clarity, security and peace of mind.
At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.
But don’t worry, we can help with that.
If you’re thinking of buying a home, you can contact us for information about the best options for you when it comes to your mortgage. You can use our calculators to find what’s the best loan for you.