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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 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.

1. Become their guarantor

Depending on your situation, you may want to think about becoming a loan guarantor for your kids. 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 home 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 and 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 others 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 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 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 your relationship.
  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 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 own 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.

First Home Loan Deposit Scheme and New Home Guarantee

The First Home Guarantee (FHBG) and Regional First Home Buyer Guarantee (RFHBG) are Australian Government initiatives to support eligible first home buyers purchase a home sooner. They do this by providing a guarantee that will allow eligible first home buyers to purchase a home with a deposit of as little as 5% without needing to pay for Lenders Mortgage Insurance (LMI).

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 kids’ savings, however it may not be 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).