Parental Guarantee for First Home Buyers

What is a Parental Guarantee?

With high property prices it can be overwhelming for first home buyers to save for a deposit. However, there is a way to make this more achievable with the assistance of those closest to you.

• The Parental Guarantee¹ enables your parents to act as guarantors for up to 20% of the purchase price by leveraging the equity in their home, or by using funds to be placed in a Unity Bank Term Deposit². Importantly, the guarantee is limited to a maximum of 20% of the purchase price. It is NOT a guarantee for the whole purchase price.

• Two loans are taken out (both in the borrower's name): 
  • Loan 1 is 80% of the property price (property being purchased is used as security)
  • Loan 2 is the difference between 80% of the property purchase price and the amount being financed. The difference is secured by the equity in the parent's property (or funds from a parent's Term Deposit) and the property being purchased. 

• This arrangement removes the need for Lenders Mortgage Insurance and assists first home buyers in getting into the property market sooner.

• As a result, you could potentially save thousands of dollars in Lenders Mortgage Insurance costs and limit your parents' liability to the amount of the guarantee.

Parental Guarantee Scenario

Laura is a first home buyer and has found a property that she wishes to buy for $700,000. She can afford to make repayments on a loan of $700,000 but doesn’t have enough funds for the 20% deposit. Laura’s parents are happy to assist her in entering the property market and have enough equity to use as security against their current property. Laura’s parents offer 15% equity by way of security of the $700,000 purchase price from their own property, which when added to her 5% deposit, enables the purchase to proceed without the need for Lenders Mortgage Insurance.

This may result in a huge saving for Laura as Lenders Mortgage Insurance can be an expensive extra. In this scenario, $105,000 has been secured against her parent’s property, and the property being purchased. There are two loans in Laura’s name.

*Stamp duty costs may apply and vary depending upon the state the property is in.

• Loan 1 for $560,000 secured by the property being purchased.

• Loan 2 for $105,000 secured by the parent’s property or funds from their Term Deposit, and the property being purchased.

The Guarantor

If you decide to use cash rather than your property’s equity, that amount can be placed into a Unity Bank Term Deposit as a guarantee to assist your child in entering the property market sooner.

Know the details:

The applicable rate for the term deposit account is the standard advertised rate. Interest on the account will be paid monthly or annually on deposits from $1,000. The term deposit can hold funds exceeding the 20% deposit, however, the amount to be used as a security for the Guarantee will depend on the Loan to Value Ratio.              

The Term Deposit will continue to roll over after the initial term investment is made, until the required Loan to Value Ratio is accomplished. The guarantor must seek mandatory legal advice before moving forward with the loan guarantee. 

Enjoy the benefits of:

Greater options & Greater flexibility 

• As the Parental Guarantee is limited, the Guarantor can choose the amount they wish to commit (up to 20% of the property purchase price).

• The guarantee can be paid off at any stage, hence the guarantors’ commitment will cease when this occurs.
  • It is encouraged that the Guarantee committed by the borrowers’ parents be reduced in terms to ensure the responsibility of the guarantors is minimised.
  • Failing this, once the purchased property increases in value, the security guarantee can be refinanced into the first loan to ensure the guarantors responsibilities cease and their security is discharged.

What are the risks?

Parents thinking of becoming guarantors for their child must know the risks before taking steps to assist their child in entering the property market:

• Becoming a guarantor is a big decision, so you must be confident in the financial situation of the borrower and yourself. Both the Guarantor and the Borrower will be interviewed separately to ensure the guarantor understands the risks, and their liability, and to ensure undue influence is not taking place.

• As the guarantor, you are liable for the amount you guarantee. In other words, you are promising to pay Unity Bank that amount if the borrower is unable to repay their loan and defaults.
  • If you decide to use funds in a Term Deposit as security, the entirety of the account to the amount of the agreed guarantee can be used.
  • Alternatively, if you decide to use your property’s equity as security and don’t have cash to pay Unity Bank upfront if asked, your house may be sold to cover the debt you have guaranteed.

• Borrowing-ability for Guarantors may be reduced as result of entering the Parental Guarantee.

• Guarantors and Borrowers must read the full Terms and Conditions of the Parental Guarantee and must seek mandatory independent legal advice before signing any documents and moving forward with the Guarantee.

First time borrowers

With a Parental Guarantee, first time borrowers can enjoy:

Before we proceed

• Are you eligible for the Parental Guarantee?
  To be eligible, you must be looking to purchase a new home for yourself.

• Are your parents interested in assisting you with entering the property market? 
  Ensure that your parents are aware of the risks and benefits associated with the Parental Guarantee. The financial position of both borrower and guarantor must also be taken into account when considering the Parental Guarantee. Both parties must be confident in their financial situations to move forward with the guarantee. The Guarantors ability to repay the second loan will also be assessed prior to a decision being made to move forward with the arrangement. Supporting documentation may be required to assess the financial position of each party.

• Are you managing your expenses well?
  Always take into consideration, Stamp Duty and legal costs, as the Parental Guarantee does not reduce, nor does it assist with home loan repayments.