Parents' Guarantees to Help Children Buy a Home in Australia breaking into the housing market can be hard for first-time buyers. This is even tougher given the recent strong values of real estate. Many young people are finding it challenging to save enough for a deposit at the same time as paying higher rents. To minimise costs lenders prefer a deposit of 20% of the properties value. To help their children get onto the property ladder, many parents (Bank of Mum and Dad) are signing up to assist by way of a guarantee. We look at what this looks like.

A parental or family guarantee is when parents use their own home as security to help secure the loan for their child.

Parents can offer this guarantee in a couple of ways. In most cases parents or family members offer a limited Guarantee. This means the parents only guarantee part of the loan. Again, in most cases this is 20% which is the amount the lender requires without charging expensive mortgage insurance. An example of this would be. Children want to buy a property for $800K. They would normally require a deposit for $160K. Parents or Family might decide to guarantee this 20% i.e. The $160K. The lender would assess the children's ability to pay the full amount of the loans i.e. $800K. On basis they could service prosed debts lender would approve 2 loans, one for $640K subject to a mortgage over the house being purchased. The 2nd loan for $160K is also just in the names of the children but is secured by a guarantee from family members and a mortgage over the family members house.

Not having to pay mortgage insurance is a huge cost saving. A family guarantee can help the child avoid this additional cost.

There are risks. If the children can't or won't pay the mortgage the guarantee can be called up by the Bank. This means the family members could lose up to $160K in the example above.

At RFS we can handle the lending aspect, however we recommend everyone get independent financial and legal advice before proceeding.