Loan Tip: An Alternative to Parental Guarantees

Parental guarantees can only be used as a substitute for a deposit. They are what is termed a security guarantee.

The obvious alternative to using the parental guarantee is borrowing the deposit from the parent instead.

This has 2 advantages

a) The parent’s property is not at risk

b) It is easier to repay and be clear about liability.

Additional advantages are that if the child stuffs up the parents might be able to claim a capital loss if they lend money, but not if they give a guarantee. I will write a legal tip about this in the future.


Example

Bart has great income but no deposit as he spends all his income on rent and coffee shops. His dad is willing to go guarantor but is a bit risk adverse when it comes to Bart.

Bart’s purchase is $500,000 so rather than put his property up as security Homer lends Bart $100,000 so he can avoid LMI and get a loan from the bank at $400,000


This has avoided the use of Homer’s property as security and no parental guarantee has been provided. Homer could only lose his $100,000 in the worse case scenario and might even be able to claim a capital loss if that happened.

 

Out of interest, do banks usually accept parental guarantees?

I have a feeling brokers would 'advise' to keep the 100k in a savings account for 3 months and get the son to reduce spending so the son is able to demonstrate this as genuine savings. This would lead to less hassles?

 

Banks accept security guarantees from parents but not income guarantees

 

Interesting, thanks Terry