Can Your Parents Help You Buy Without Giving You a Cash Deposit?

Your parents may be able to help without giving you cash

When people think about parents helping their children buy a home, they often imagine Mum and Dad handing over a large cash deposit.

That isn't the only way family support can work.

With a family guarantee, a lender may allow a parent or eligible family member to use some of the equity they already have in their property as additional security for your home loan.

For example, if you have enough income to comfortably service a home loan but haven't been able to save the deposit normally required, a family guarantee may help bridge that gap.

Depending on the lender and your circumstances, this can potentially help you:

• buy sooner without waiting years to save a larger deposit
• reduce the amount of cash you need upfront
• avoid or reduce Lenders Mortgage Insurance (LMI)

Importantly, your parents don't necessarily need to give you their savings or transfer ownership of their property to you.

They are using a portion of the equity in their property to support your loan.

Your parents don't necessarily guarantee your entire home loan

This is one of the biggest concerns we hear when discussing guarantor loans.

Parents understandably don't want to suddenly become responsible for their child's entire mortgage.

With many family guarantee structures, the guarantee can be limited to a specific amount rather than covering the entire home loan.

The amount required will depend on the purchase price, your deposit, the lender and the value of the properties involved.

However, there is an important point for buyers to understand:

A guarantor helps with the security or deposit side of the transaction. They don't make an unaffordable home loan affordable.

You still need to demonstrate to the lender that you have sufficient income and borrowing capacity to repay the loan yourself.

And for the parents, becoming a guarantor is a serious financial commitment.

If the borrower cannot repay the loan and the lender suffers a loss, the guarantor could ultimately be required to meet their obligations under the guarantee.

That's why guarantors should understand exactly what they are agreeing to and obtain independent legal and, where appropriate, financial advice before proceeding.

The guarantee doesn't necessarily need to stay there for 30 years

Another common misconception is that once parents guarantee a home loan, they're attached to it for the life of the mortgage.

That doesn't necessarily have to be the case.

The objective with many family guarantee strategies is to eventually remove the guarantee once the borrower has built sufficient equity in their own property and satisfies the lender's requirements.

That equity can build in two ways:

• by paying down the home loan over time
• through an increase in the value of the property

For example, once the loan-to-value ratio reaches a level acceptable to the lender, it may be possible to apply to have the guarantor released.

The timing will depend on the lender, property value, loan balance and the borrower's circumstances at the time.

This is why we believe a family guarantee should have an exit strategy from the beginning, rather than simply setting it up and forgetting about it.