It’s no secret that housing affordability in Australia has made it harder for many first-home buyers to break into the housing market—but there are options available to explore.
In 2000, the Government stepped in to help first-home buyers by introducing the First Home Owner Grant. In its 2017 Budget, the Treasurer announced a proposal for a new First Home Super Saver Scheme, where members can save for a house deposit using their super account. While this might seem attractive at first, it will generally not be enough on its own to help someone break into the housing market.
Some families have come up with an alternative for assisting first-home buyers. Typically, today’s Baby Boomers have paid off their primary residence, and in some cases, might own a separate investment property. This puts some in the enviable position of being able to provide a head start to their children entering the housing market by offering to ‘go guarantor’. There are, however, some key things to think about before forging ahead.
What does it mean to ‘go guarantor’?
Generally, this means the guarantor (often a parent) gives the borrower (typically their child or loved one) the use of equity in their own home instead of money towards the borrower’s deposit. By doing this the guarantor is effectively accepting the legal responsibility of making repayments to the loan, if the borrower becomes unable to do so.
Are there any benefits in going guarantor?
For many parents, the primary benefit of going guarantor is the emotional satisfaction of knowing their children are making payments towards their own home rather than continuing to pay rent.
Aside from this, the benefits are mostly for the homebuyer as this kind of arrangement also helps reduce the buyer’s borrowing amount, and can mean that lenders won’t need mortgage insurance—a cost typically passed on to the borrower.
Are there any risks in going guarantor?
Anyone considering going guarantor needs to carefully consider the risks, as they sit squarely with the guarantor rather than the borrower. For example:
- if the borrower can’t make their loan repayments, the guarantor is then obligated to make these repayments. However, if the guarantor can’t meet these repayments, a default will appear on the guarantor’s credit report. Ultimately, the guarantor risks having to sell their own property that was used as security to meet the loan repayments.
- if the guarantor later applies for a loan, the debt associated with assisting a borrower will form part of the guarantor’s credit application, and could impact their chances of taking out future loans.
- if the relationship between the guarantor and the borrower breaks down, the guarantor is still legally responsible for the financial commitments associated with the loan.
There are also important estate planning implications to consider. What happens if either the borrower or guarantor dies? Do the wills for all parties take this into consideration?
Despite the risks and potential obligations, research by Mortgage Choice indicated that a rising number of parents have chosen this method to help their children in purchasing their first home.
Is going guarantor the only option?
Some might be put off or intimidated by the risks, so another option to consider might be to help the borrower with their deposit by making a one-off ‘gift’ payment, or even a loan. This eliminates the ongoing risk of being legally responsible for the borrower’s debt. This option also allows the lender / gifter to avoid the risk of losing their property.
But before you do anything…
We strongly recommend that anyone considering a guarantor option speak with a qualified legal representative. Going guarantor is a legal commitment that can have ongoing financial implications that affect the lives of more than just the guarantor and borrower.
Written by Natalie Eden, Private Client Adviser, UniSuper Advice