Parental Guarantee Schemes

What is it?
With first home buyers struggling to purchase their first homes, it's now becoming common for 'Parental Guarantee Schemes'. This is where lenders allow borrowers to use equity from property owned by their parent or parents to serve as security or collateral for a home loan. In other words, a parent or both parents become a guarantor for the borrower's home loan.

When should this be considered?
The parental guarantee scheme is generally useful for borrowers who don’t have enough saved up for a home loan deposit. Home loan rates are the best with an 80% Loan Value Ratio (LVR) or when the borrower has 20% of the property value as deposit. With the parental guarantee scheme, a borrower can gain access to these rates without having the entire 20% deposit.

Things that Parent guarantors need to consider
A lender reaches out to the guarantors only in case a borrower is not able to keep up with repayments.
Before opting to become a guarantor, it is vital to consider the following:

• The probability of a payment default
• Impact of financial wellbeing in case repayments need to be paid by guarantor
• Possibility of lender owning equity put as collateral

It is, therefore, best to seek professional advice to understand how to make the best of a parental guarantee scheme as each borrower’s circumstances are unique.

Information courtesy: Yellow Brick Road Home Loans

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