Parents can use the equity in their home to help their children buy a home. This option can: Help home buyers to access the market sooner, help the borrower save money by reducing or avoiding the need to pay Lenders Mortgage Insurance
How does it work?
The guarantor uses equity from their home to guarantee part of their child's loan.
The guarantor is not required to give any cash to the borrower for their deposit. The guarantee is limited and allows the guarantor to choose the amount to commit as security for their child's loan.
The guarantor can request to be released when the required loan to value ratio is achieved before the loan is repaid.
It's critical that the borrower has the budget to afford the loan as the guarantee does not reduce or assist with home loan repayments.
It is also important for the parent to understand that in acting as a guarantor, a portion of their property is being used as security for the loan taken out by the borrower. As a result there is a commitment to pay back the amount of the guarantee in the case the borrower defaults.
Example
David is planning to purchase a $500,000 property with a $25,000 deposit (LVR of 95%), which means Lenders Mortgage Insurance (LMI) would be payable due to the high LVR for this loan.
If David's parents have equity in their home, they could provide a Parental Guarantee of say $75,000 as additional security on the loan, reducing David's LVR to 80%.
This scenario would mean David can avoid paying Lenders Mortgage Insurance, saving him up to $16,500.
Benefits for the Borrower
Helps to reduce or avoid Lenders Mortgage Insurance, saving you money
Helps you access the market sooner
Maximise the amount you can borrow – up to 100% of the purchase price plus costs such as Stamp Duty and Legal Fees
Get help from your parents without having to ask them for cash to contribute to your deposit
Benefits for the Guarantor
You can act as a guarantor whether your loan is with Westpac or with another financial provider
You can nominate a specific amount that you're comfortable to contribute as security for your child's loan
You can be released when the borrowers loan to value ratio is reduced to the required level
You can help your children buy a home without having to give them cash
Eligibility
Parental Guarantee is available for applicants who are buying their first property, either as an owner occupier or investor. It is also available where the applicant already owns one property although only if they are purchasing as an owner occupier.
Parental Guarantee can be provided by parents or legal guardians.
A single guarantee is able to represent no more than 50% of the guarantor's security.