August 02, 2023 by Simone Ruddock
Purchasing your first home is a dream for many, but with increasing property prices and stricter lending policies, it can feel like a goal that is out of reach. In Victoria, the real estate market has experienced significant growth in recent years, making it even more challenging for first-time homebuyers to get into the property market. However, there is a solution that can help you – a Guarantor.
What is a Security Guarantee?
A Parental Security Guarantee, also known as a Family Pledge or Parental Guarantee, is a financial arrangement that allows first-time homebuyers to use their parents or family members' property as collateral to secure a home loan. Essentially, it is a legal guarantee provided by the guarantor (usually the parent or family member) to the lender, assuring that if the borrower defaults on the mortgage, the guarantor will step in to cover the outstanding debt.
How does it work?
The process of using a Parental Security Guarantee is relatively straightforward, but it's essential to understand the implications for both the borrower and the guarantor:
- Eligibility
To qualify for this type of arrangement, the borrower must demonstrate a stable income, good credit history, and the ability to afford the loan repayments. - Guarantor's equity
The guarantor must have sufficient equity in their property to act as security. The lender will assess the value of the guarantor's property and may require a valuation. - Limited liability
The guarantor's liability is generally limited to a specific percentage of the property's value to bring the transaction down to 80% Loan to Value Ratio. Once the borrower has paid off a portion of the loan, the guarantor's liability can be reduced or removed.
Benefits of a Parental Security Guarantee
Easier access to finance: One of the most significant advantages of using a Parental Security Guarantee is that it helps bridge the gap between the deposit amount and the total purchase price, making homeownership more attainable.
- Avoiding Lenders Mortgage Insurance (LMI)
With a smaller deposit, most lenders would require the borrower to pay LMI, which can be a significant expense. By providing a guarantee, the lender may waive the LMI requirement. - Lower interest rates
By offering additional security through the guarantee, borrowers may have access to more competitive interest rates, potentially reducing their overall mortgage costs. - Building equity sooner
Getting onto the property ladder earlier allows the borrower to start building equity and potentially leverage it for future investments.
Risks and Considerations
While a Parental Security Guarantee can be a valuable tool for first-time homebuyers, it's essential to consider the potential risks involved:
- Strain on the guarantor
The guarantor takes on a significant financial responsibility and potential risk, as they are liable for the borrower's mortgage in case of default. Open communication and trust between all parties is crucial. - Affecting guarantor's borrowing capacity
The guarantor's ability to access credit may be impacted as their property is being used as collateral for the borrower's loan. - Legal and financial advice
Seeking professional legal and financial advice is essential to understand the legal implications and obligations of both the borrower and guarantor.
For first home buyers in Victoria facing the challenges of high property prices and tough lending requirements, a Security Guarantee can be a lifeline as it makes owning their own home a more attainable goal.
