How mum and dad can help you get a house without putting a cent down.

Guarantor - how does it work?

Ok, so you’ve heard the word guarantor, but how does it work and how does it help you into your first home? Does it increase how much you can borrow? Does it lower your mortgage? Are mum and dad risking losing their house?

Very simply put: a guarantor can help when you have not saved up enough for a deposit. Instead of having to pay a deposit (because the bank does not lend you 100% of the value of the house) you can use a bit of mum and dad’s house as security to get enough borrowing to fund your whole house. So, the bank will give you 80% of the value of your house and land package secured against the property you’re about to get build, the other 20% they will give you with your mum and dads’ house as security. You’ll have to pay both of those mortgages (100% of the value of your house) though, but you save having to put in a deposit.

Does that mean that mum and dad are now forever tied to us? No, once your home has grown enough in value (or if you have paid off enough of your mortgage) for the bank to secure the full amount against your home, you can refinance and get rid of the guarantor.

What are the downsides for mum and dad? They now have a bit of their equity tied up to secure your home so they can not use that part to for instance buy an investment property with and if they’re looking to sell soon, that will be a bit more hassle too. If they’re not planning to make any big moves in the next few years and they trust you to make the repayments, they wouldn’t even notice the difference. If you were to stop the repayments and flee the country, they could be on the hook for the 20% that’s secured against their home. If they think you are not trusted to make your repayments, they’re better off not being your guarantor.

The bank doesn’t want to lend me enough for what I want: will a guarantor help me? No. The bank is willing to lend you a certain amount of money based on your income, debts, family situation etc; that amount does not change by getting a guarantor. You just don’t need the deposit. Now you also need to use part of your borrowing capacity to include what would otherwise be your deposit.

An example:

• Couple A has a borrowing capacity of $320000 and have 80k saved. They can get a package of $400000 at 80% Loan to value ratio.

• Couple B also has a borrowing capacity of $320000 has no savings, but has a guarantor. They can get a package of $320000 only, with their parents putting up part of their equity - 20% = $64000 worth - as security.

My parents don’t have property, can they be guarantor? No. They can help you with a cash gift for the deposit, but that’s different to being guarantor. They can also go on the application together with you; effectively you’re buying a house together then, which is also different to a guarantor, which will only help you for your borrowing capacity, not on the deposit part.

Parents going guarantor, helping their children to enter the property market earlier happens more and more. In most cases the parents can be released from being guarantor after a few years, making it an easy choice for many parents. Other factors parents do consider is; do we want to use the equity we now tie up in this time, can we do the same for our other kids or can we only help this one, or “how do we tell this lazy son of ours that we don’t trust him to pay his dues”?

Good luck with that one mum and dad!

#finance #guarantor #deposit