Ep14: Ask Max – What is a Parental Security Guarantee and can it help get me into my first home?

In today's property market, getting your foot through the door can seem like a daunting task.

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Prices are high, deposits are hard to come by, and the dream of home ownership just seems a little bit out of reach for a lot of Australians, young and old at the moment.

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Parents, they're watching on the sidelines, wondering how they can help out.

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They want to help their kids get into the market, but not all parents have a spare $200,000 just sitting in cash waiting to be gifted.

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But they may have property.

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And that could be used as parental security guarantee.

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And that's exactly what we'll be talking about this week.

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Welcome to the Home Loan Insider.

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I'm Max Lending, your industry insider.

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And we're lifting the lid on the finance market, guiding you on how to cut through the jargon, manage your finances and get investing into the property market.

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Ladies and gentlemen, you know my next guest.

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Please welcome back to the Late Show, Max.

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Max.

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Max.

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Max.

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Max.

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Max.

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Max.

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Max.

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Max.

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Max.

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Who could forget the name of a magnetic individual like you?

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Max.

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Max.

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Max.

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Max.

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Max.

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Max.

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That's the way Max is.

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Decisive, uncompromising, and rude.

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That's right, people.

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You heard correctly.

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It's another episode of Ask Max.

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So this week's question came in audio format from a listener named Chloe.

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I, uh, really like this question because it touches on a subject that not a lot of people bring up, which is parental security guarantee.

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Let's have a listen and see how we can help Chloe out.

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Hi Max, my name's Chloe.

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I love the podcast.

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You make it really straightforward and simple to understand.

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So I'm looking to purchase my first home around $600,000.

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But I don't have a 10% deposit saved up.

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My parents said that they can help out with either some cash or use of their investment property as security guarantee.

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They prefer the security guarantee option, they said.

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But I'll be honest, I'm not 100% sure what that actually involves.

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So hopefully you can help out with that.

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My financials are as follows.

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I work for a large corporate firm as a team leader.

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I earn around about $115,000 a year and that includes my superannuation.

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I get a yearly bonus of about $10,000 a year, and I have a $5,000 credit card, and that's the limit.

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I have a $12,000 car loan, which I pay about $400 a month in repayments.

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I'm single, I have no kids.

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In terms of savings, I have about $48,000.

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This will be my owner occupied that I'm looking to purchase, and I'm looking to move into it and not rent it out, and I live in Brisbane, by the way, if that helps.

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Can you let me know what my options may be?

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Thanks.

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Perfect.

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Thanks, Chloe.

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Oh, lots to unpack here.

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We'll go through the calculations a little bit later, but let's talk about what a parental security guarantee actually is.

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OK, that's probably the main part here.

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A parental security guarantee allows parents to use equity in their home or investment property to secure part.

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Of the kids home loan.

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The purpose of all this is to significantly reduce the loan to value ratio, which is the LVR, and to help avoid the dreaded lender's mortgage insurance, also known as LMI, which can save thousands of dollars.

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We're talking anywhere from 5 up to $20,000 plus if you're needed to actually pay LMI.

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All right, let's go through that because I'm sure I've already lost half of you just on that sentence alone.

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In the essence of making this as simple as possible for you guys, I'm just going to use round numbers so that way we can grasp the concept of it.

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Let's say you're looking to purchase an $800,000 property, but you haven't been able to save sufficient funds to make an 80% LVR to avoid LMI and get that great 80% or below interest rate.

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Well, what you can do is actually go to the bank and borrow 100%.

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Of the purchase price and your parents can provide their security as the additional equity to get the LVR down to 80% and avoid LMI and get the 80% interest rate.

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The maths here if you're following along at home is an 800K property that's being purchased plus at least $200,000 equity guarantee from the parents property making it.

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What's that?

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A total of $1 million in equity, the 800 plus the 200, and that's going to be used to secure the 800K loan, making it a grand total of an 80% LVR.

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As long as you can service the $800,000 loan yourself, you'll be able to get financed for 100% of the purchase price of that property that you want and you get to avoid the dreaded LMI.

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Now if you remember from previous episodes.

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LMI kicks in when the LVR is above 80%, and this is an additional cost payable to protect the bank in case you default on the loan as you're seen as a riskier client.

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All right, OK, so now what's the benefit of doing it like this?

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Well, there's a few.

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You get to avoid LMI, which we've gone through.

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You get to save the parents from having to use their cash.

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Now they can just use their equity so that way they can get on with their life without feeling weighed down.

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You get increased borrowing power.

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So as long as you can service that 100% loan off the purchase property and you're good to go.

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And it's faster entry into the market because as you know, there's this phenomenon.

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You either wait to save up for the house that you want and by the time you saved up, that house is increased in price.

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So it's a carrot that never quite seems to get there.

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This way you can get into the market straight away.

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Now what's the risks?

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Where do I begin?

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How much do you trust your kids?

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Are they financially responsible?

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Because if they're not and they default on their loan, potentially they'll run the risk of being forced to sell their property.

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So the bank can actually reclaim those funds.

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Remember, this is a security guarantee.

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It's not a servicing guarantee.

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Parents are not there to service the loan.

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They are purely there to provide security.

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A lot of banks, they'll actually make the parents go get independent legal advice to ensure that they're aware of the risks before they get into this.

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A big risk that I like to talk about that I don't think a lot of people actually even think about is the family dynamics.

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Will everything stay the same, or will your parents constantly be judging you because you're not paying down the loan quick enough so that they can release their security?

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You need to make sure proper expectations are set by both the parents and the kids so it doesn't cause strain on the relationship.

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As the only way normally to release the parent's security is either for the property to have increased in value sufficient enough so that the LVRs now stand alone at 80%, or for you to actually have paid down the loan so that it sits at 80%.

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Now lastly, the big one is for the parents.

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Using their home as security guarantee will actually affect them in any future borrowings they might want.

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They need to consider how this might actually impact their financial plans in retirement.

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If they can't sell their property and it's locked into their kid's home loan.

07:56

Hey guys, sorry to interrupt your regular listening.

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We're just going on a small intermission.

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If you're enjoying today's episode, we have many more just like it.

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I'd recommend listening to episode 5, What's the different type of home loans?

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Or episode one, What is an LVR?

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Can it affect your interest rate?

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That's intermission over.

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Now back to the show.

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OK, so let's go back to Chloe and let's see if we can get her into a house.

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From the audio message that she sent through, she said she earns about 115,000 a year, including super plus 10,000 in bonus.

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She doesn't have kids, she's single, has about a $12,000 car loan that she's paying 400 a month for, and a $5000 credit card.

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All right, let's dust off the Weekend Investor borrowing power calculator.

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Just a reminder, you can download that from the website as well if you want a copy of it.

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And let's plug in these details.

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While I do that, you can listen to the beautiful sirens of Enya.

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I'm gonna push you guys as hard as I can on these musical choices until you crack.

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OK, I've done the calculations and I've put in 100% of the purchase price being 600 K and drumroll.

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Unfortunately, Chloe, you don't service at a 600K maximum alone.

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You do service just above 500,000, so.

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Let's do what we do best here at the Weekend Investor, and we'll see what your maximum borrowing capacity could be if we make some changes.

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You've said that you've got forty-eight 1000 in savings, so as we're going to be going for 100% loan by using the security guarantee option, let's use those savings to pay off that car loan of 12,000 and we'll reduce your credit card limit from 5000 down to 1000.

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OK, now that we've inputted the new data, you've gone from 500,000 maximum servicing to 580,000.

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OK, close to 600 K at least it's in the ballpark for what you're looking for.

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So hopefully that helps.

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You'll definitely be able to pick up something for around 580 though, which is great.

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Good thing is Chloe being in Queensland might actually qualify for the first homeowners grant out there, so stamp duty is probably covered.

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But if it wasn't at about the 580 mark, you're looking approximately about 15K in stamp duty, so not too bad.

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You've definitely got sufficient savings to pay off that loan and cover stamp duty.

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At a loan amount of 580, you're also looking at around about 3500 a month in mortgage repayments.

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That's with the interest rate for an owner occupied at about 6.2%.

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With the income that you've stated, you take home about 6600 a month.

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So we're looking at a bit over 50% of your take home pay is going to go towards the mortgage repayment.

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It's a little bit high, so I'd probably recommend purchasing lower than your maximum threshold just to give you a bit more breathing room, considering that's your first home and that you've got to get used to these mortgage repayments.

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But at least you know where you stand.

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I really like that question today.

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It really shows that there are other ways that you can look at getting into the property market if you haven't saved up enough funds as yet.

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In Chloe's case, she's got very nice parents who are in a financial position to be able to supply a security guarantee to her.

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This will allow Chloe to hold on to the majority of her cash and also allows her to get into the home quicker and start growing her property portfolio.

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Thank you very much guys for listening to another episode.

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Don't forget to like and.

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Subscribe and share it to your family and friends if you liked the episode.

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And as always, you stay classy and I'll see you at the next one.

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If you have a question that you would like answered on the show about budgeting, mortgages or finance, then drop us a line either via our socials, e-mail or website.

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Details available in the show notes.

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Any opinions and views expressed in this program are just that opinions.

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All information is general in nature and should not be seen as financial, economic, legal, investment, accounting or tax advice.

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This program makes no representation or warranty as to the accuracy or completeness of any information contained in this program.

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You should consult a professional advisor in relation to your own personal circumstances.