What is a Parental Guarantee?

Parental guarantees are often used by first home buyers to overcome a lack of savings and therefore qualify for a home loan which enables them to get into the property market sooner.  The maximum purchase price for first home buyers in WA before stamp duty kicks in is $430,000.  Some banks will lend up to 95% of the purchase price meaning a buyer needs to have 5% in savings eg: $21,500 plus sufficient to cover the upfront fees which would be approximately $3500 so $25,000 altogether.  For many first homebuyers, saving this amount of money is a real struggle so this is where a parental guarantee can help.

Let’s assume you want to buy a property for $430,000 and you have no savings whatsoever but your parents are happy to act as guarantors.  Purchase price is $430,000 plus costs $3500 so you need to borrow $433,500.  Their property is worth say $700,000 and they have an existing mortgage of $200,000.  Scenario is as follows:

Loan to valuation ratio (LVR: loan total divided by total value of properties) is only 56% so plenty of equity for the bank.  Usually the bank would lend up to 80% of the value of your property which is $344,000 ($430,000 x 80%) but you are borrowing $433,500.  Your parents in their capacity as guarantors are liable for that portion of the loan above 80% which in this example equates to $89,500 ($433,500 – $344,000).  In theory, your parents are potentially liable for the life of the loan but once you have built up 20% equity in your own property, you can apply to the bank to have your parents released as guarantors and everyone then lives happily ever after.

There are 3 advantages to you.  Firstly, a parental guarantee helps you to overcome the savings barrier, secondly, it helps you avoid paying mortgage insurance saving you thousands of dollars and finally you can potentially negotiate a cheaper interest rate because your loan is seen as being less risky.

Terms and conditions of parental guarantees can differ between banks so give us a call and let us hold your hand through the process.