This snippet is from one of our previous episodes: Top Tips for First Home Buyers. 

Getting into the property market is tough, especially when it comes to saving that all-important deposit. But what if parents could help without handing over any cash? 

In this TPC Gold bonus episode, Bryce and Ben answer a listener question about using a parental guarantee to buy a first home… and unpack how this strategy can help you get on the property ladder sooner (while potentially saving you tens of thousands in LMI). 

Here’s what you’ll learn: 

  • How a limited parental guarantee actually works 
  • Why it can be a powerful strategy for first home buyers 
  • Common misconceptions about principal & interest vs. interest-only loan structures 
  • The risks (and rewards) parents should understand before offering up their equity 
  • How much lenders typically require before releasing a guarantee 
  • Why splitting the loan into two portions can give you more control and flexibility 

If you’re a first-time buyer looking for ways to speed up your entry into the market or a parent wondering how to support your kids without sacrificing your own financial stability… this episode is a must-listen. 

Thinking About Buying Your First Home?

Our award-winning Mortgage Broking team at Empower Wealth can help. They’ve helped thousands of clients secure the right loan structure for their goals and avoid costly missteps along the way. 

Take the next step toward owning your own home. 

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If You Enjoyed TPC Gold | Using Parental Guarantees to Buy a Home, You Might Also Like: 

Transcript

Bryce Holdaway
This next one is from Tom: Hi guys, love the podcast, found it recently and have already gone through 70 episodes. Bit of a way to go, yep, there’s about 181 to go. I’m currently in the process of purchasing a principal place of residence for $550,000. I’ve saved around 15% as a deposit.  

Ben Kingsley
Nice work. 

Bryce Holdaway
But using a parental guarantee as collateral to free up my deposit amount for a value-add renovation and as my buffer going forward. My mortgage broker suggested a P&I loan with an offset account, but has suggested an interest only loan isn’t possible with a parental guarantee as the bank likes the debt pay down to release the second parental mortgage. Is this the case? Can the guarantee be released on money in an offset? Or is the only option waiting for your debt pay down to the release at which point the loan is to refit to an interest only loan?  

Ben Kingsley
Tom, Tom. Not the information that I have available to me. So what we don’t know, Tom, is which lender, the broker that you’ve been talking to, has suggested. So there’s literally hundreds of lender options out there in the marketplace these days. The particular lender that you’re looking at may have that as part of their policy. And it’s sort of, you think about it logically, it sort of makes sense. So parental guarantee is usually for 25% of the value, and the other 80% is secured against the property that they’re buying. So in that case, you’d be thinking P&I on that to pay it down sooner would be logical. But the reality is, is there’s definitely lenders out there where you do not have to go principal and interest on either of the loan splits.  

So it still takes time to build money up in the offset and a parental guarantee will only be released when the peak debt is below 80% on the value. And obviously that’s why the best type of parental guarantee loans are what we call limited guarantees, which means it’s only limited to that amount. It’s not limited against the whole security amount. So there you go, Tom. So the particular lender, and there might be other reasons why your broker has suggested that, but it’s not what I know from our team here in regards to doing some inquiries about it. We know of a couple lenders who you can go interest only. So there you go. Hopefully that helps Tom, good question.  

But good news also for anyone who is thinking about this. I mean, this is our First Home Owners sort of special podcast. So guarantees are really helpful. You know, if you’re thinking about how you’re building money up through family and generation and leaving a legacy, that is a very, very good way in which parents can help. So they don’t have to necessarily be cashflow help in the Bank of Mum and Dad. But what they can do if that security is sitting there, they can use that as a means by which your children don’t have to necessarily save for deposits. So we do know through the research, Bryce, that the number one biggest challenge is saving for a deposit. And we’re going to be talking more about that with one of the questions coming up. So from my point of view, of course there are risks and so you need to get your own advice. That’s the parents I mean, in regards to what that means.  

But these days, there’s lots of good information out there where you can do some reading around what parental guarantees are. So I would always say to people, if this is a way in which you want to get your children into the property market without necessarily giving them a cash gift, you can do so in doing this through this type of arrangement where it’s security. So they’re using the equity in your property and then they’re still releasing that money as a loan. But the person who pays that loan back is the borrower, which is the first home buyer, whether it be a single or a couple, and then over time, they will pay that down, the value of the property will go up, and then the parent’s equity will be discharged, and nothing to see here. So certainly something to consider if you’re wanting to help your kids get in the market, but understand the risks and the rewards associated with that.  

Bryce Holdaway
Yeah, Ben, so to use the numbers in the example here: $550,000; the bank would comfortably lend you $440,000 which is 80%.  

Ben Kingsley
Love it.  

Bryce Holdaway
And then the balance of the $110,000 plus the stamp duty and costs, let’s call it 5% in this case, around $28,000. So there’s $138,000 that you would ordinarily, in that scenario using 80% lending… $138,000 that you would ordinarily be looking to fund via saving for a deposit. So what we’ve just talked about then is that limited guarantee that says the Bank of Mum and Dad says I can secure against their asset… typically the principal place of residence for the $138,000 so that you can then get into the property. But you need to service the whole lot. You’re not servicing the 80% and Mum and Dad are servicing the rest; you are servicing the whole lot.  

Ben Kingsley
And if you have two loan splits, if this was me doing the lending structure, I would split it out into the $440,000 and then the $138,000. And I may still choose to do a P&I if that borrower really does want to work and focus on paying that down so they can release their parents. So that obligation makes perfect sense because the question is, why would a first home buyer do that? Well, they’ve avoided lenders mortgage insurance by doing that because they’re borrowing greater than, obviously the 80% which gets you into lenders mortgage insurance territory. But it’s being secured by the parent’s property. So in a lot of cases that’s potentially a $10-15k, in some cases a $20,000 saving that that borrower is getting. And it’s better in your pocket than banks’ profits or lenders mortgage insurance profits. So certainly something to consider and have a conversation at the dinner table with your parents if it’s an option for you to get you into the property market sooner rather than later.