Should you ask your parents to go guarantor?

Having your parents act as a guarantor can make it much easier to buy a property with a small deposit. For many reasons, it isn’t an option for everyone. You need to be fortunate enough to have parents who own their own home and are willing to help you out.

If this is an option you are considering then you need to understand how going guarantor works and the risks involved. This will make it easier when you ask them for help.

How a home loan guarantee works

If you have a small deposit and your home loan application isn’t very strong, having a parental guarantor can reassure your lender and boost your chances of success. But if you can’t repay the debt your parents might have to repay it and even sell their property in the worst outcome.

That’s what makes a home loan guarantor risky.

But if your parents agreed to guarantee a further 15% of the property’s value (that’s $90,000) your lender would consider your loan to value ratio (your deposit size versus the property’s value) to be 20%. You’d still need to borrow 95% of the property’s cost, but your lender won’t charge you LMI on top. That’s because having a guarantor reduces your lender’s risks.

In this scenario, your parents’ home is on the line if you can’t repay your loan early on. But once you’ve repaid that first $90,000 of the loan amount (the 15% portion they guaranteed) then they’re off the hook. The rest is up to you.

Before asking your parents to go guarantor you should answer the following questions as best you can:

If your parents are renting and don’t own a property then they can’t act as guarantor. The lender needs a property that someone actually owns to secure the loan.

Home loan rates are at record lows right now. But that can’t last forever. Recalculate your home loan repayments with a higher rate and see if you can still afford it. If you’re looking at a home loan with a 2.5% interest rate, imagine it’s now 4.5%. Can you still afford the repayments?

Finances and family are potentially a damaging combination. If you’re worried that tying your finances into your parents’ finances with a guarantor arrangement will cause trouble, then it’s probably not worth it. But if you are confident you can handle the debt, have your parents’ trust and everyone understands the risks involved then there’s less to worry about.

You hopefully know your parents well enough to understand the best way to approach the subject of going guarantor.

Sitting your parents down and explaining the guarantor process might work for some people. For others, you may want to raise the subject of guarantors and gauge their response before asking them straight out.

You could mention you’re looking at properties and speaking to lenders or a broker. Then casually mention how your lender told you about guarantors.

However you ask them, the best thing is to make it clear that you’d like your parents’ help, but be equally clear that they can say no. Going guarantor is a big ask and it’s not without risks. Make it an open-ended question or discussion at first.

If they are interested, take the time to explain how the guarantor process works as best you can. Get them to talk to your lending specialist or mortgage broker. And they will also need to get independent financial advice before going guarantor. It’s a good idea to mention that as a way to reassure them.

Asking your parents to go guarantor is a big step and it isn’t the right move for everyone. But if you approach the situation carefully it doesn’t hurt to ask.

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