Using a Guarantor for your First Home

Saving for a deposit can be an uphill struggle for a lot of would be first home buyers these days. 

Even if you have 5-10% deposit, loans are in short supply due to the Reserve Bank Restrictions or there are strict criteria to have to meet. Bigger monthly surpluses are usually required for a low deposit loan compared to a 20% deposit loan depending on the bank.  

Parents are helping more these days, usually with a cash handout by way of Gift or Deed of Acknowledgment of Debt. This often helps supplement their kids KiwiSaver and or Savings.

One option that has been around for some time but not tended to be used a lot recently (in my experience) is parents using their property to be guarantors for a portion of the lending their kids need to get to 20% deposit. 

It is a lot more than just a signature on a bit of paper, the guarantors must go through the same financial ‘grilling’ that the kids do. Not only do parents need to have available equity that could provide security for part of the kid’s lending, but they also need to have solid income to be able to show they could meet repayments on the guaranteed portion if the kids defaulted. A guarantor also needs to provide enough to get to a 20% deposit, not less.  

So, an elderly parent just on a pension or with no employment would struggle to be approved as a guarantor. 

Often when a parent sees the paperwork required in being a guarantor, they lose interest quickly. Or they are not comfortable with being exposed to some of the kid’s debt. 

But if they understand the pros and cons and can handle the paperwork burden, it can be a good leg up for the kids as having 20% equity helps borrowing power (as a lower surplus is usually required on the servicing calculator), avoids low equity fees and helps get better interest rates.

Having a guarantor is there to provide extra security to get to 20% equity, not extra income to borrow way more than what would normally be affordable. 

For example, let’s say the kids wanted to buy a house of $600,000 and only had a 10% deposit being $60,000. 20% deposit would help them be more aggressive with offers, improve their chances of getting approved and get better rates. 

If the parents had a freehold house (or at least plenty of equity available to cover an additional $60k of lending exposure and still be under 80% LVR) and good income, they could consider being guarantors. 

The kids would still borrow and make payments on $540,000 ($600k less $60k deposit), but $60,000 of that $540,000 total lending would be secured against the parents’ house. The parents being liable for that $60,000 if the kids defaulted. 

The idea for the kids is to pay down the loan quickly to build up equity and aim to release the guarantor in a few years. This can also be escalated with adding value and possible capital gain. As soon as the kids can show they have 20% equity, then you would seek to release the parents guarantee. 

Now every bank is a little different on how they work it, but the above scenario gives a very broad and simple outline on how the logic behind it works. 

As always seek help from a Mortgage Adviser such as Craig Pope to help cover off all the options.