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How to Use a ‘Limited Guarantee’ to Help your Children to Buy Their Home

Information Supplied By Michael Richardson, Branch Manager, Mortgage House, Sutherland

Rising house prices are making it near impossible for younger people to enter the local Sydney property market. Parents or close relatives who partly guarantee their child’s loan may make their dream a reality without using cash.

Being a guarantor generally means using the equity in your own home, or residential investment property as part security for your child’s home loan. It is acceptable that you may have a current mortgage on the guarantor property. Guaranteeing can help a first-home buyer to secure finance for a property they can afford, but may not have a large enough or in fact any deposit. This can also avoid the added cost of lenders Mortgage Insurance. (LMI)

The total borrowers’ loan amount may be as much as their home purchase price plus all associated cost, depending on borrowers’ ability to service the loan. There is no requirement for guarantors to be earning an income and in fact no direct assessment at all of guarantors’ ability to service the child’s loan.

There are other advantages as well. By guaranteeing a loan, you are helping your child enter the property market sooner. Your child may be able to buy in a more desirable location and a home that better suits their needs. If they did it on their own, they may need to go further out of the city or perhaps settle for fewer bedrooms.

As the child’s new home grows in value, anyone a party to the loan may request cancellation of the guarantee and withdrawal of their security property. Provided the lender has then sufficient security value in the purchased home.

The Risks
You may want to help your child but it’s important you don’t go into the transaction blindly.
The main risk of guaranteeing the loan is that you could be liable for the guarantee amount should your child default on the repayments. A limited guarantee to an agreed amount at loan application limits your exposure.

Minimising the Risks
There are ways to minimise the risks. The most common is using a monetary gift or private loan. This involves borrowing money against your property in your name, and then gifting it to your child. Having a legal agreement in place is highly recommended.

When it comes to guaranteeing a loan, it’s always sensible to speak to a professional. You should also consider asking a legal professional to draw up a formal loan document if you are lending money yourself, outlining all conditions of the loan, interest rates and expected repayments.

Finally, outline an exit strategy. Financial situations change and as the loan amount decreases with repayments, there may be an opportunity for you to withdraw your support to free up your assets without impacting your child’s loan.

If you would like to discuss this option further, please contact our office on 9525 8788 to arrange an appointment.

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