Q: My daughter has been working two jobs for years to save up a deposit for her first home, but as time goes by property is just getting more expensive which puts her goal further out of reach. We don’t have cash to lend her, but we do have equity in our home. Can we use our home’s equity to go guarantor, or would we have to sign our life away on her mortgage?
A: Things are certainly difficult for first home buyers, especially in and around some of the capital cities. There are ways to help though, and being a guarantor or being a co-signer, or co-applicant, on their mortgage are two of the ways.
Being a guarantor doesn’t necessarily mean that you have to sign your life away on another 25 to 30 year home loan. If you were to co-sign the mortgage or be a co-applicant, then that means you are on the loan and will be responsible until it’s been fully repaid, which is a big commitment.
Being a guarantor however helps strengthen an application for a home loan, but a lender will still need to see that your daughter can afford to repay the home loan in her own right, and she may still need to use, or at least show evidence of, her genuine savings.
You can help your daughter get into her first home sooner by providing extra security for her bank or lender through your home’s equity, which is handy if she hasn’t managed to save up the full 20% deposit. This could also allow her to save on costly Lenders Mortgage Insurance (LMI), which typically kicks in when you borrow more than 80% of a home’s value.
The other good thing is that you don’t have to guarantee the whole mortgage. If your daughter has saved a 10% deposit for example, you could guarantee just 10% to help her avoid LMI.
If your daughter splits this 10% you are guaranteeing from the rest of her mortgage by getting a split home loan, once the property has increased in value to cover your 10%, or once she’s made repayments to that value, then you are no longer needed and can be ‘released’ from the guarantee. The good news is the loan doesn’t have to be repaid in full for this to happen – just the amount that you are providing security for.
There are some risks to going guarantee that you need to be aware of. You will be liable for your guaranteed portion of the property if your daughter fails to meet her repayments. Your ability to borrow will also be impacted by the guarantee.
There are other options to help first home buyers with deposits or repayments, but as a proud father of two I understand the urge to help your children, so if being a guarantee is something you want to look into, then it’s important to seek independent financial and legal advice to ensure it’s right for you and your daughter’s circumstances.
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