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Did you know your parents might be able to help you scale the property ladder – without even dipping their hands into their pockets?
It’s true. By acting as a guarantor, your parents can boost your chances of being approved for a home loan, without even forking out any cash.
Essentially, what a guarantee involves is your parents guaranteeing some, or all, of your home loan, either through their existing assets, or their income. I.e. they are offering the lender security in the case that you should fail to meet your loan obligations.
This is a great way parents can assist their children into the market.
Of course, the risks for your parents are that you do fail to meet your loan obligations, so it’s important to be serious about any guarantee arrangement – the last thing you want is your parents to lose their home because you’ve been negligent with your finances.
The best way to protect against this happening is to do your due diligence from the outset when it comes to assessing your servicing capabilities.
Another way to reduce risk is for your parents to offer a limited guarantee, rather than unlimited. This involves a guarantee of around 20 to 30 per cent of the property’s value, usually at least enough to remove the need for lenders mortgage insurance (LMI) – which can save you a lot of money, but at the same time remove any excessive risk for your parents.
Of course, a guarantor loan requires careful consideration. If you’re thinking about a guarantor loan be sure to seek advice from a mortgage broker – as well as a lawyer, and don’t forget to discuss it thoroughly with your family.