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Helping your kids get into their first home sooner

Helping your kids get into their first home

With housing affordability a key issue facing many West Australians, the ability for some young people to save for a house deposit is becoming increasingly difficult.

We know as parents you always want to help, but at the same time, you’ve also got your own goals. There are a few ways you can support your kids to get into their first home sooner, without making major sacrifices on your own plans.

1. Become their guarantor

Depending on your situation, you may want to think about becoming a loan guarantor for your kids.

Typically, someone that 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 Fee or may potentially mean their loan application is declined.

What is a guarantor?

A guarantor is someone, usually a family member, who offers equity in their own home as security for a home loan. Depending on the circumstances, a security guarantee can either be for the full loan amount  or limited to an agreed 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 Lenders Mortgage Insurance (LMI) and some of the risks and responsibilities for the guarantor.

Who can be a guarantor?

Guarantors generally include 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, such as being over 18, working (exceptions may apply), being able to service the loan in the event of a default and having 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 enter the housing market with a smaller deposit, increase their borrowing capacity and potentially avoid the costs of Lenders Mortgage Insurance, but there are risks and responsibilities involved.

As an example, if your kids default 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 credit provider may sell the asset that you put up as security to pay the outstanding debt.

Before agreeing to be a guarantor on a loan, it’s important you do your homework:

  1. Request a copy of the loan contract and understand how much the loan is for, the repayments, loan term, the interest rate, loan type and your own security obligations. We also have certain obligations to provide you with a number of documents too, such as evidence of loan applicant serviceability, and to explain what happens if your kids default on the loan payment.
  2. Consider your relationship with your kids. For example, if there's a breakdown of the guarantor arrangement due to a default on the loan payments, it could place a strain on your relationship.
  3. Evaluate both of your financial situations. Can they afford to pay the loan in the event of long-term illness, or do they have the appropriate personal insurance? Do you have the capacity to cover the portion you guaranteed if ever needed?
  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 financial situation.
  6. As a lender, we make sure a number of hurdles are met before accepting a guarantor on the loan, to protect you too.

There are also a few things you could discuss with your kids - some additional options to help with their home buying journey.

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 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 Loan Deposit Scheme (FHLDS) is an Australian Government initiative to support eligible first home buyers purchase a home sooner. It does 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).

You can find out more, including eligibility requirements, on the FHLDS page on our website.

First Home Super Saver Scheme

The first home super saver (FHSS) scheme was introduced by the Australian Government and allows you to save money for your first home inside your super fund. This will help first home buyers save faster with the concessional tax treatment of superannuation.

Visit the Australian Tax Office’s website for more information.

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 consider providing support in other ways to help your kids get ahead.

One way is to offer to have your kids stay at home for longer with the proviso that they put a set amount of money aside each week in lieu of rent to save for a house deposit. This can make a big difference in the long run if your kids aren’t having to pay for rent while also saving for a house, 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. It’s still important to encourage your kids to save and set goals to buy their first home, however this removes the risks associated with being a guarantor while also ensuring they aren’t up for LMI.

Being in a position to be a guarantor arrangement may bring a feeling of contentment. Before making the commitment, make sure you carefully consider the risk and responsibilities involved, investigate other options available, understand how this may affect your financial situation, and seek professional advice.

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