Home loan help: parents stump up security for kids’ mortgages

Huge mortgages can be hard to secure, and more parents are using their own homes to help out. They should know the pitfalls.

Surging mortgage interest rates and high house prices are prompting more parents to consider going guarantor for their adult children’s new mortgages.

The strategy can help young homebuyers get into housing sooner and usually doesn’t cost mum and dad a cent – but the potential pitfalls can be devastating.

A guarantor typically stumps up part of their own home or other asset as extra security for the child’s loan, and if repayments falter the parent’s home may be at risk.

Home loan specialists say careful thought and planning is necessary for all family members involved.

Oracle Lending Solutions managing director Angelo Benedetti says his firm alone has been doing three guarantor loans each week as demand surges.

“A lot of parents are helping out their kids,” he says.

The federal government’s first home loan deposit scheme – which enables some buyers to purchase with just a 5 per cent deposit and avoid paying expensive lenders mortgage insurance – is another option but comes with restrictions such as maximum purchase prices.

OPEN CONVERSATIONS

Benedetti says parents considering going guarantor have “got to be comfortable with their relationship with their child, and also their child’s partner”.

“Have a great rapport and open conversation,” he says.

And be very wary if you are worried about your child’s money management skills.

Zippy Financial's Louisa Sanghera says discuss the details. Picture: Julian Andrews

Mortgage broker Zippy Financial’s founder, Louisa Sanghera, says guarantors provide additional security to a bank by guaranteeing that they will be responsible for a certain portion of the loan.

“A guarantor loan can help people buy their own home sooner, without having to spend years and years saving for a deposit,” she says.

“The aim is usually to refinance the loan within a few years to a standard residential loan, so you can release the guarantor from any obligations or responsibilities,” she says.

WORST-CASE SCENARIO

Sanghera says people should discuss the arrangement in detail before moving forward.

“What happens if you lose your job? What if you get injured and can’t work? Talk through all the worst-case scenarios so you’re prepared in advance,” she says.

Sanghera says all parties should get independent financial advice before committing, allow for future interest rate rises when assessing affordability, and shop around to get the best mortgage deal available.

“Pay off as much of the loan as fast as you can to reduce the loan balance, so the guarantee can be released as soon as possible,” she says.

“You’ll generally need to hit an 80 per cent loan-to-value ratio before the guarantor can be released.”

Sanghera says guarantee loans may not be a good idea if the guarantor plans to move soon, as some contracts won’t allow them to sell the property security that underpins their child’s mortgage.

MORE KIDS?

Parents who have multiple children should also consider the impact, she says.

“Some banks will allow you to be guarantor on more than one child’s house, but every lender has different policies,” she says.

Finspo CEO Angus Gilfillan guarantors do not always provide security through equity in their property – a less common way is through income assistance, known as a servicing guarantor.

Gilfillan says lenders differ on who they allow to be your guarantor.

“Generally, lenders will accept parents, spouses or de facto partners, plus close family such as siblings,” he says.

“Many lenders will not allow distant relatives or friends to act as your guarantor.”

Finspo chief executive officer Angus Gilfillan says parents can also guarantee income.

RISKS OF GOING GUARANTOR

• You may have to pay back the entire debt if the borrower can’t make the repayments.

• It could stop you getting a future loan.

• You could get a bad credit report if the borrower cannot pay back the guaranteed loan.

• It could damage your relationship with the borrower.

• Do not feel pressured to go guarantor – this may be a sign of financial abuse.

Source: Moneysmart.gov.au

Originally published as Home loan help: parents stump up security for kids’ mortgages