Financing Our First Home

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  ol mate on 14/10/2023 - 16:35

  +13

  We're thinking of asking my parents to be guarantors, using the accessible equity of their rental property, as the deposit for a property we would like to purchase and then using the money we've saved (our original deposit saved) to help reduce our repayment amount moving forward.

  I don't think you understand the purpose of a guarantor.
  Usually a guarantee is only used to purchase when the borrowers have <20% deposit and don't want to pay LMI (the guarantor steps in where the bank would involve a LMI insurer normally - i.e., if the bank had to foreclose on the property due to non-payment, etc. and there was a shortfall between the sale price and the amount owed, the bank would ask the guarantor to front up the difference or sell the guarantor's property instead of asking the insurer to cover said losses).
  In this situation, the borrower will still pay interest on the whole amount borrowed (e.g. let's say $1m property with a 100k deposit - 90% LVR - the guarantee will allow the borrower to borrow without paying LMI. The borrower will still be paying interest on the $900k borrowed).

  What it sounds like you're trying to do is (using the same $1m property in the example above) pay interest on only $600k whilst borrowing $800k with the other $200k "guaranteed" by your parents' property. The bank still has to borrow the $200k elsewhere to lend to you, so I'd expect they'd still want you to pay interest on that extra $200k.

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    Gunnar on 14/10/2023 - 18:41

    This! The guarantor loan doesn’t reduce the amount you repay save for the LMI

    Where a guarantor loan can help you in your situation is keeping your saving for use as you need. Unfortunately you still have to pay the principal of your loan regardless of how you structure it.

    The only way to bring down your total loan repayments is increase how much personal cash you have to the house. As above, your parents’ guarantee is still a loan which still needs to be repaid

    • 

      nuggins on 15/10/2023 - 09:59

      Thank you for explaining how a guarantor works. My initial understanding was off, so your explanation really helped clarify that. Thank you.

      • 

        Gunnar on 15/10/2023 - 11:02

        If you want to keep some of your savings you can do a split. Say you have a 20% deposit of $200k in savings and purchase price is $1million. Instead of putting all the $200k you can put in $150k and then have your parents guarantor $50k

        This way you have $50k up your sleeve in case anything happens or you need emergency repairs and it’s only a small amount that is guaranteed. When your property appreciates by $50k then refinance leveraging the house’s worth freeing your parents’ guarantor loan.

        Regardless you will still have to pay the $1 million purchase price (as either an $800k or $850k loan) but this structure you’ll have more savings up your sleeve in case of emergency

        In all honesty though don’t worry about what people tell you on here , it’s what your broker says that matters because they will know the nuances of your financial situation and what you can/should do

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          nuggins on 15/10/2023 - 21:43

          @Gunnar: Thank you. That makes sense and yes, I'll definitely speak to a broker :)

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    Malik Nasser on 14/10/2023 - 19:37

    I am glad you understood what the OP was asking. I read through it twice trying to figure out how this scheme worked.

    Guarantors use their own assets as collateral for your loan, so if you fail to make repayment your guarantors are on the hook for your outstanding debt. Its just another way for the bank to lower their risk, as the amount of assets against the loan has now increased (your home + parents rental property), which essentially lowers the Loan-to-Value Ratio (LVR).

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      nuggins on 15/10/2023 - 10:01

      Thank you. That's helped me to understand how the more assets against the loan lowers the LVR. But of course that introduces the risk to the guarantor.

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  elgrande on 14/10/2023 - 18:22

  We're thinking of asking my parents to be guarantors, using the accessible equity of their rental property, as the deposit for a property we would like to purchase and then using the money we've saved (our original deposit saved) to help reduce our repayment amount moving forward.

  Ummmmm. Still need to pay interest on that $200k. Its just your borrowing it against the rental property.

  • 

    nuggins on 15/10/2023 - 10:07

    Thank you. This is helped me to better understand the whole borrowing thing when a guarantor steps in.

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  ihbh on 14/10/2023 - 19:51

  +2

  If you can manage, please don't ask your parents or anyone to go guarantor. I'm not sure what's involved in quarantining the potential loss to just the equity in the investment
  property, but it's not easy. And you wouldn't want to put their principal residence at risk, would you? If you can't manage, best ask for the parent to sell the investment property and give you the money and not guarantee anything (think of it as your early inheritance).

  E.g. A friend of a relative went guarantor for someone (I don't know the full details), but when they couldn't service the loan lost their house in a good suburb and had to live with his daughter in her apartment. He was around 70 when he did this - good heart, but silly bugger.

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    nuggins on 15/10/2023 - 10:06

    Thank you for your advice and I'm saddened to hear what happened to your friend. But you're right, I wouldn't want to add risk to my parents situation. So I'll definitely need to think this one through more.

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  avoidfullprice on 14/10/2023 - 23:51

  +1

  Looking forward to hearing people's thoughts.

  Looking forward to read you thank helpful comments to any of your four posts here.

  • 

    nuggins on 15/10/2023 - 10:08

    +1

    Appreciate the reminder to say thank you to those who posted :)