September 15, 2016
The popularity of parents going guarantor on their children's loan has risen significantly in recent years, new research has revealed.
According to Mortgage Choice's annual First Home Buyer Survey, 4.9% of all first home buyers had a parent or immediate family member go guarantor on their home loan.
“This is up from 3.9% in 2015 and 3.8% in 2014,” Mortgage Choice chief executive officer John Flavell said.
“This slight jump in demand for home loan guarantors is unsurprising when you consider that property prices have risen fairly substantially across most property markets over the past few years.”
Data from CoreLogic found property prices across the combined capital cities rose 8.3% over the last financial year, with Sydney and Melbourne the standout performers.
“Given that property prices continue to rise month after month, it is little wonder why so many first home buyers are finding it difficult to put a foot on the property ladder without some form of financial support.
“By having a family member go guarantor on a home loan, first home buyers are not only able to get their foot on the property ladder sooner rather than later, but they can also potentially avoid paying Lenders Mortgage Insurance.”
Today, many lenders allow a family member to go guarantor on a home loan. They simply use the equity in their property as additional security for the borrower's loan.
While the primary security for the borrower's home loan is the property they purchase, the lender also takes a mortgage over the guarantor's property. This mortgage does not support the loan directly, but is used to support the guarantor's financial guarantee.
Mr Flavell said guarantors effectively help borrowers – especially first time buyers - save thousands of dollars.
“As property price growth continues to outpace wage growth, it is becoming harder and harder for first time buyers to save the deposit they need in order to purchase property,” he said.
“By having a guarantor, first home buyers can (in most instances) borrow the full purchase price and sometimes even the costs associated with purchasing property. The amount of the guarantee depends on the individual lender's policies. The guarantee can vary from the full loan amount to as little as 20% of the loan (where the loan is for 100% of the purchase price).
“After a first home buyer builds up equity in their property, their guarantor can ask to be released from the loan.
“Provided the first home buyer can comfortably make their regular mortgage repayments, there is very little risk associated with this type of financial assistance. As such, I would expect to see continued growth in the proportion of first home buyers using guarantors.”
If you would like to learn more about guarantors, please refer to our Money Chat videos.