Entering the property market is no easy feat for a first homebuyer, and it’s common for parents to support buyers either by gifting funds for a deposit or by acting as guarantor on the loan.
Before taking the plunge, it’s important to understand the implications involved. Here are three key questions to ask yourself before deciding whether a family guarantee is right for you.
1. Am I Financially Fit to Be a Guarantor?
The first thing to consider is whether you are financially capable of paying off the loan if the borrower is no longer able to meet the repayments.
There can be many unexpected disruptions to income, such as loss of employment or a serious accident, and some guarantor loans make the guarantor legally responsible for ensuring the mortgage is repaid.
It’s always wise to seek independent legal and financial advice before agreeing to become a guarantor, ensuring your financial position is strong enough to support the commitment.
2. Do the Benefits Outweigh the Risks?
Saving for a deposit can take years, and becoming a guarantor may help a first homebuyer enter the property market sooner and potentially avoid Lenders Mortgage Insurance (LMI).
However, whenever money is borrowed or a mortgage is secured against property, risks need to be carefully considered.
Acting as a guarantor can place your own property or financial position at risk, and it may also reduce your future borrowing capacity.
3. Are There Other Ways to Help?
If contributing to a deposit is an option, it can provide support without putting your property at risk as a guarantor.
However, lenders may have additional requirements when a deposit includes gifted funds.
Gifted funds are generally not considered genuine savings by lenders. If the deposit is less than 20% of the property’s purchase price, the lender may require the borrower to demonstrate at least five per cent genuine savings of their own.
