A Gift Suited For The Property Market
While the current housing climate in Perth is on the gentle rise after a 2-year low, adults in their 20s and 30s are still struggling with affordability issues. While they may have savings, it’s not enough for a deposit and as a result either still live with their parents or are caught up in the rent trap.
For many parents, the idea of having their children living at home after the age of 30 is less than ideal, but in our current economic and housing climate, it’s becoming a reality. As a team here, most of us are parents and we understand that you only want the best for your children – and more importantly, a home of their own. However, in recent years it’s become harder for young people to achieve their financial goals, and their savings won’t cover a deposit and property fees for a home.
There is a solution to this though, where both you and your children draw the long straw. While your children may not be able to currently afford a deposit for a home loan, you have the ability to act as guarantor for them. Before you disregard the idea, becoming a guarantor is less risky than you think. Less risky than what many people think.
A guarantor is a related third party, usually a spouse or family member, who agree to provide additional security for the borrower should things go pear-shaped. Usually, this comes in the form of their own property.
Many people are wary about becoming a guarantor as there are preconceived ideas about the kind of liability you would be subject to. The most extreme being losing your own home to repay the borrowers debt. While there are risks in becoming a guarantor, there are various types you can choose from to suit your own finances.
There are great benefits in becoming a guarantor for your children. Not only can they buy their own home or become a property investor sooner, they can borrow more funds that they would be unable to without a guarantor, avoid paying a lender’s mortgage insurance and receive cheaper interest rates.
Not only will this allow your children to move out sooner and own their own home, you can choose from various low-risk guarantees. The most low-risk being the limited security guarantee; while the borrower is still able to borrow 100% of the property value, the guarantor is only liable for a small part of the entire amount required. Potentially neither you or your children will need to come up with any deposits or fees.
Take, for example, a first home buyer with a loan for a $400,000 purchase. If you were to choose the limited security guarantee arrangement, there would be two loans set up for the borrower coming to a total of $405,000, which includes fees. The first would be in the amount of $320,000 and the second amount would be $85,000. In the instance where the borrower is unable to pay his debt, the guarantor will only be liable for the $85,000 loan instead of the full $405,000. In this way, the risk and liability is restricted for guarantors to the smaller amount they agree on.
Trefor states that the “structure of a limited security guarantee is being used more and more by parents to help their children, usually first home buyers, to get started.”
While this guarantor method may suit some individuals, it may not be the right one for you. If you were curious about other types of guarantee arrangements available, leave us a message in the comment section or send us a message and organise a free-appointment.
While our current housing climate does not favour young people trying to break into the property market, there is way that you can aid them in the process that will set them up for life.