Having children is a life-long sentence. When they are babies you worry about them swallowing batteries, when they are teenagers you worry about them falling into the wrong crowd and when they are in their 20s and 30s you worry about them being able to afford their own home.
First-home ownership among 18 to 39 year olds has dropped from 29% to below 20% in Sydney, and the figures are not that much better in the other major cities: 21% in Melbourne, 30% in Brisbane and 31% in Perth.
In a recent survey by the lawyers Slater and Gordon, 26% of Generation Y said that they would need some help from their parents to get into their first home.
That is great if the Bank of Mum and Dad can afford it, but even if you are not in the position to help out your children with a bundle of cash, there is still a way you can give them a financial leg up. If you own your own home, you can help your kids get their first step on the property ladder by becoming a parental guarantor.
What is a parental guarantor?
It is when a parent uses the equity in their home as security against a loan taken out by their child. For example, if you have $500,000 equity in your home, you can put up part of that, say $100,000, to provide your child with additional security value, allowing them to borrow more of the purchase price of their new home.
What are the benefits?
- Saving for a deposit can be hard, especially on top of paying rent. By freeing up the equity in your home as deposit for your child, it means that they can skip having to save for a deposit and can move into their own home faster.
- If you do not have a deposit of 20%, lenders require you to take out lenders’ mortgage insurance (LMI), which covers them if you are unable to meet your repayments. By being a parental guarantor means that you will avoid or reduce the cost of LMI.
- So long as your child keeps up their mortgage repayments, it will not cost you anything.
- Once your child has built up the equity in their home, or paid off enough of their mortgage to cover your initial security, you can dissolve the agreement, although this might incur fees.
- So long as you have enough equity in your home, you can become a parental guarantor for loans for all of your children.
What are the potential risks?
- With all loans, there are risks involved. Your home is at risk should your children default on their loans.
- By agreeing to act as a parental guarantor, your ability to take on further loans for yourself or others will be diminished.
Of course, as with all financial decisions, becoming a parental guarantor isn’t something that should be rushed into without first speaking to the experts. But by doing your homework, and working with your trusted mortgage professional, tapping into the equity in your home could help secure the financial future of your entire family.
Louisa Sanghera is a Finance Broker for Residential Mortgages, Vehicle and Asset Finance, Commercial Lending and Budgeting and Cashflow Coaching with Zippy Financial.
She has gained more than 30 years in the Banking and Finance Industry, and since founding Zippy Financial, has become a multi award nominated expert in the field of finance featuring regularly in industry press and speaking at finance & investment seminars across the country.