There are a number of different ways you can help your children purchase their own home through a gift or a parental guarantee. There are different structures under the parental guarantee, which we will explain here.

Firstly, why do parents help their kids buy their own home?

  • Help kids enter the housing market

    With Perth house prices at an average of $462,000 (according to Corelogic Jan-2018) many first home buyers simply can’t afford to enter the housing market.

  • Reduce purchasing costs, such as Lenders Mortgage Insurance (LMI)

    If you don’t have a big enough deposit to make sure the Loan to Value Ratio (LVR) of the purchase is 80% or less, the lender will make you pay for LMI. The smaller the deposit, the larger the LMI cost. The larger the deposit, the smaller the LMI cost. Even a small amount of financial help by parents can reduce the cost of LMI by thousands of dollars. For more information about LMI, click here.

  • Increase the chance of lender’s approval

    Banks have different policies on the amount they will lend to clients based on the loan amount and LVR. The higher the LVR and loan amount, the more stringent bank requirements are to provide a loan. By reducing the LVR or the loan amount, banks will be more flexible with their lending policies.

  • Reduce borrowing costs

    Most banks will tier the interest rate relative to the LVR. If your loan has an LVR under 80%, most banks will provide their lowest interest rate. The interest rates, in general, increase above 80% LVR and again at 90% LVR.

Banks will want to see that the borrower has been able to save at least 5% of the purchase price by themselves. Alternatively the borrower needs to show they have been making rent payments equal to or greater than what the new mortgage repayments will be. Banks call this “genuine savings”. This means, parents can’t give the entire deposit as a gift to their child because it doesn’t show a good savings conduct for the bank.

There are a few smaller lenders who don’t care about genuine savings, but we won’t recommend them. When looking at your loan options, we feel strongly that any borrower making such a large financial commitment needs to be sure they can manage their money and be able to repay their new debt. It wouldn’t be fair on them or their parents who helped them if they end up struggling with the new loan.

How does a gift work?

Parents simply gift a sum of money to their child. The gift needs to be non-refundable and banks will require you to sign a statutory declaration that this is in fact the case. Gifts are usually given close to settlement and it allows the loan amount and the LVR to be reduced.

What can go wrong?

The two most common problems relate to the child’s partner or parents in retirement or close to retirement.

If you give a gift to your child who has purchased a property with a partner, and they separate, who is entitled to the gift? There is a chance that some or all of the gift will go with the partner and not your child.

Giving gifts may influence the parent’s ability to access the aged pension. There are complex retirement issues relating to this and we recommend you speak with your accountant or financial planner if you are thinking of gifting some funds to your child.
Parental Guarantees

There are two common types of parental guarantee. Both require the parent to have enough equity in their own home and, in some cases, to be able to service the guarantee amount.

A Security Guarantee

This is provided when the borrower can demonstrate that they can service the new loan, however require assistance from the guarantor to provide security to support the home loan and reduce the need for LMI by bringing the LVR to 80%.

The security guarantee can help the borrower to secure a loan with a lower deposit and lower interest rate. However, it puts the guarantor at risk of losing their property or assets if the borrower is unable to repay the loan. Therefore, it’s important for the borrower and the guarantor to fully understand the terms of the loan and the risks involved before entering into a security guarantee agreement.

There are Two types of security guarantees that can be used for home loans, including:

  1. Property security guarantee: This type of security guarantee involves using a property as collateral for the loan. This can include the borrower’s own property, or the property of the guarantor.
  2. Term deposit guarantee: This type of security guarantee involves using a Term Deposit as collateral for the loan. This is one of the easiest types of guarantees but not all lenders accept Term Deposits as guarantee collateral.  The Term deposit stays in the guarantors’ name, the guarantor receives the interest, the borrower cannot access the Term Deposit and the Term Deposit must stay with the lender until the 80% LVR level has been reached.

All security guarantees are limited guarantees: a limited guarantee is where the guarantor only guarantees a certain portion of the loan and not the entire loan.

It’s important to note that the type of security guarantee used will depend on the lender’s requirements and the borrower’s circumstances. Also, some types of security guarantees may have different legal requirements and implications. It’s important to understand the terms and conditions, and the risks involved before entering into any security guarantee agreement.

A Servicing Guarantee

These types of guarantees are required when the loan amount is more than what they can afford so the guarantors (mum and dad) help make repayments. There are too many restrictions on this product to go in to detail here. Because of the restrictions, this structure is rarely used.

Parent Assist Guarantee

This is a new type of guarantee structure that combines and overcomes some of the problems with a cash out and servicing guarantee as described above. Parents make a formal documented loan to their child who then has to make payments back to the parents on interest only terms.