How to help first home buyers onto the market

With housing affordability a key issue facing many West Aussies, the ability for some young people to save for a house deposit is becoming increasingly difficult. We know as a parent you always want to help, but you will also have your own financial goals.

Here are a few ways you can support your kids to get into their first home sooner, without making any major sacrifices to your own financial future.

1. Become their guarantor

Depending on your situation, you may want to think about becoming a loan guarantor for your child. Typically, someone who needs a guarantor may not have a big enough deposit saved. Without a guarantor, it could mean they need to pay expensive Lender’s Mortgage Insurance (LMI) or that their loan application is declined.

What is a guarantor?

A guarantor is someone who offers equity in their own property as security for another home loan. Depending on the circumstances, a security guarantee can either be for the full loan amount or limited to an agreed smaller amount.

Usually, banks will allow the guarantor to provide a limited guarantee for an amount sufficient to reduce the borrowing amount as a percentage of the total security provided - for example, to less than 80% of the purchase price. This reduces the need for LMI as well as some of the risks and responsibilities for the guarantor.

Who can be a guarantor?

Guarantors are usually immediate family members - such as parents, spouses, de facto partners, siblings, adult children or grandparents - although other people are considered in certain circumstances. To be a guarantor, you must also meet certain criteria set by the bank; be over 18, be employed (exceptions may apply), be able to service the loan in the event of a default, and have sufficient equity in your own home.

What do I need to consider if I’m thinking about becoming a guarantor?

Being a guarantor may help your kids, but there are risks and responsibilities involved. For example, if your child defaults on their loan obligation, then as the guarantor it becomes your legal responsibility (for the portion that you have guaranteed).

This responsibility might include the principal amount, any interest and default interest, as well as any fees incurred by the bank in resolving the default. If you are also unable to service the loan, the bank may sell the asset that you put up as security to pay the outstanding debt.

Before agreeing to be a guarantor on a loan:

1. Request a copy of the loan contract and understand how much the loan amount is, the repayments, loan term, the interest rate, loan type, and your own security obligations.
2. Think about your relationship with your child and consider whether a breakdown of the guarantor arrangement could place a strain on it.
3. Evaluate both financial situations thoroughly.
4. Consider a limited guarantee. You may be able to limit the amount of the guarantee to help reduce your own risk and responsibility.
5. Finally, talk to your solicitor and financial adviser to make sure you fully understand what is involved and how it may affect your financial situation.

As a lender, P&N Bank ensures certain criteria are met before accepting a guarantor on a loan.

2. Look into the government grants and schemes available

There’s a range of Federal and State Government grants and schemes available to support first-time home buyers, which can assist with saving for a deposit, removing the need for LMI and reducing the deposit requirements.

Home Guarantee Scheme

The Home Guarantee Scheme is an Australian Government initiative to support eligible home buyers purchase a home sooner. There are three Guarantees within the scheme; First Home Guarantee, Regional First Home Buyer Guarantee and Family Home Guarantee. To learn more, visit the Housing Australia website.

First Home Owners Grant

The WA State Government’s First Home Owners Grant (FHOG) is a payment to assist first home buyers to buy or build a new (or substantially renovated) residential property for use as their principal place of residence. More information, including full eligibility criteria is available on the Department of Finance website.

3. Provide non-financial support

If you are not in a position to be a guarantor, you could offer to have your kids stay at home for longer with the proviso they put a set amount of money into savings each week, in lieu of rent. This can make a big difference to your child's savings, however it may not be an option suitable for everyone.

4. Gifting and loaning

Another option might be to gift or loan your kids a portion of the required deposit. This removes the risks associated with being a guarantor while also ensuring they avoid Lender’s Mortgage Insurance (LMI).