The Pros of Parental Guarantees: How to Make It Work for Your Family
A parental guarantee (sometimes called a family guarantee) allows a parent or close family member to use part of the equity in their property to help the borrower secure a home loan. Instead of providing cash, the guarantor offers a portion of their property’s value as additional security to the lender. Parental guarantees can help some buyers overcome common barriers to homeownership, but they must be approached carefully and with full understanding of the risks and responsibilities involved.
Why Families Consider Parental Guarantees
While parental guarantees are not suitable for everyone, they may offer certain advantages when used appropriately and with the right professional guidance. Here are some of the potential benefits:
Entering the Property Market Sooner
Saving a 20% deposit can take years. When a parent offers a guarantee, the borrower may not need to wait as long to save the full deposit, allowing them to enter the housing market sooner if it suits their situation and goals. However, buyers should consider whether entering the market earlier aligns with their long-term financial plans.
Reducing or Avoiding Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance is typically charged when a borrower has less than a 20% deposit. A parental guarantee may help reduce LMI or remove the need for it, depending on the lender’s policy, the loan structure, and the borrower’s overall position. This is not guaranteed, and outcomes vary between lenders.
Improving the Borrower’s Loan Options
A parental guarantee may strengthen the loan application by adding extra security. This can sometimes help borrowers:
- Access a broader range of lenders
- Strengthen their position when assessed by the lender
- Improve their serviceability profile
This does not mean guaranteed approval, lower interest rates, or special loan terms, it simply means the application may appear more secure due to the extra backing.
Helping Families Support Each Other Without Cash Transfers
For parents who want to help their children buy property, providing cash can be challenging. A parental guarantee allows families to assist without handing over savings, as long as they fully understand the associated risks. The guarantee is usually limited to a portion of the property’s value, rather than the entire loan, depending on the structure and lender policy.
Flexibility to Remove the Guarantee in Future
Parental guarantees are generally designed to be temporary. Once the borrower builds up enough equity in the property, through repayments or market growth, the guarantee may be removed, subject to lender approval and valuation. This process is not automatic and may involve refinancing, fees, or reassessment.
Key Responsibilities and Risks to Understand
While parental guarantees can offer benefits, they also carry significant responsibilities for both the borrower and the guarantor.
Guarantor Liability
If the borrower cannot meet loan repayments, the guarantor is legally responsible for the guaranteed portion. Their home or assets may be at risk if obligations cannot be met.
Impact on the Guarantor’s Borrowing Capacity
A parental guarantee may affect the guarantor’s ability to borrow in the future, as lenders take guarantee obligations into account.
Family Dynamics
Financial arrangements within families can create emotional or relational pressure. Open communication and legal advice are essential before proceeding.
Need for Independent Legal Advice
Most lenders require guarantors to obtain independent legal advice before finalising the guarantee. This ensures everyone clearly understands the arrangement and associated risks.
How Families Can Make a Parental Guarantee Work Smoothly
Have an Honest Family Discussion
Discuss expectations, responsibilities, risks, timelines, and what might happen if financial stress occurs.
Get Professional Legal and Financial Advice
Both parties should receive independent, qualified advice to ensure the arrangement is suitable and compliant.
Set Clear Exit Goals
Plan for when and how the guarantor can be removed, such as when the borrower reaches 20% equity. A mortgage broker can explain how lenders typically assess guarantee releases.
Parental guarantees can offer strong advantages for some families, from helping buyers enter the property market sooner to reducing upfront costs. But they require careful planning, clear communication, and a solid understanding of the legal and financial responsibilities involved. A parental guarantee should never be entered into lightly. With the right structure and independent advice, it can be a supportive and strategic way to assist the next generation into home ownership. General information only from BrokerCo.