An interesting state of affairs is playing out in Perth’s property market at the moment, with their market at a complex crossroads.
On the one hand, newly expanded first-home buyer incentives and strong interstate migration are tipped to drive a surge in Perth property prices, with demand expected to outpace supply well into 2025. Yet at the same time, a new report has laid bare the deepening housing crisis across WA, highlighting a severe shortfall in affordable homes, soaring rents, and growing pressure on vulnerable households.
While opportunity knocks for some buyers, the state must urgently balance growth with solutions that address long-term housing accessibility.
In this week’s newsletter, we look at how parents can guarantee a home loan for their children to help get them into the property market sooner.
Reliance upon the “bank of mum and dad” to help out with a home loan deposit, driven by Australia’s ongoing cost-of-living crisis, escalating property prices, has continued over the past 12 months. In some instances, the parents provide cash to their children to put towards a deposit, but what is perhaps more common, is the parents providing a guarantee.
A parental guarantee, commonly known as a family guarantee or guarantor loan, allows a parent or close family member to help their child buy a home by offering part of their own property as security. This can enable the borrower to avoid paying Lenders Mortgage Insurance (LMI) and potentially purchase a home sooner, even with a small deposit.
Typically, the guarantor does not contribute any cash. Instead, a portion of the equity in their home (often 20% of the purchase price) is used to secure the loan. This additional security reduces the lender’s risk, enabling the borrower to access better interest rates or borrow up to 100% of the property value, including costs like stamp duty.
Pros
- Avoids LMI: Saving borrowers thousands in upfront costs.
- Faster entry into the property market: Especially helpful in rising markets.
- Better loan terms: Lower interest rates may apply due to reduced risk for the lender.
Cons
- Guarantor liability: If the borrower defaults, the guarantor is responsible for the guaranteed portion.
- Risk to family property: The guarantor’s home may be at risk if repayments are not met.
- Impact on borrowing capacity: The guarantor’s ability to take out future loans may be reduced.
Parental guarantees can be a powerful tool, but they come with significant responsibilities. Both borrower and guarantor should seek independent legal and financial advice to fully understand the risks and obligations before proceeding.
Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
