Guarantor loan still a popular option for buyers
Househunters can avail of a bigger mortgage if their parents guarantee it, writes Laura Slattery.
It might not always seem like it, but there are plenty of people who have no interest in when Ikea will finally open in Ireland, don't care if interest rates go up and only ever open newspaper property sections to see the inside of celebrities' homes.
These are the people who, despite earning a solid wage and perhaps even despite snaring a partner earning an equally solid wage, are resigned to the idea that it's just not enough income to qualify them for a meaningful mortgage.
And anyway, who wants to be saddled with a lifetime of freedom sapping debt?
There are, however, also plenty of well-intentioned parents out there who know from experience the benefits of owning their own property and never mind the lifetime of freedom-sapping debt - they want their twenty-something or thirty-something children to know the benefits too.
Not all parents have conveniently saved lump sums to hand over or feel comfortable with the idea of borrowing against the value of their own home to boost their grown-up children's buying power.
But there is another, more traditional way in which parents can help with their children's property purchases: by acting as a guarantor on the mortgage.
"There's no doubt that you can borrow more if you have a guarantor," says Michael Dowling, mortgage broker at Sullivan Dowling and president of the Independent Mortgage Advisers' Federation (IMAF). "I have seen an additional €100,000 or €125,000 being made available."
One couple were approved for a 100 per cent mortgage for €350,000 based on their own incomes, and planned to buy a house selling for €345,000. They later spotted a house in a more convenient area that had a price tag of €470,000.
Out of their reach? Not with their parents acting as guarantor. The couple got a 92 per cent mortgage on the property, with the parents acting as guarantor for €75,000, according to Dowling.
There was a possibility that the recent introduction of 100 per cent mortgages, where first-time buyers can borrow the full value of the property instead of having to come up with a deposit of at least 8 per cent, would prove to be a death knell for guarantors.
This is because lenders consider only the borrowers' own income when calculating their eligibility. (This rule does not apply to older 100 per cent loans for certain professionals.)
"There's no doubt that with 100 per cent finance, more people are trying that first rather than going down the guarantor route," says Dowling. "But the reality is that a fair number of applications are being declined for 100 per cent finance, so the guarantor is still an option for some people who have a shortfall."
But different lenders take different views on guarantors and how much more, if anything, they are willing to advance, based on their signature.
"You will find that the likes of AIB and Bank of Ireland would offer greater amounts of guarantee to certain clients of good standing, but the norm is for the guarantee to be no greater than €30,000 over what the applicant actually qualifies for," says Deirdre Leonard, mortgage adviser at brokers REA. Guarantors are becoming less and less common, she believes.
"Obviously, the financial standing of the guarantor will have a major bearing on how much the lender is prepared to extend to their child," says Liam Ferguson, managing director of mortgage broker Ferguson & Associates. "A Smurfit or O'Reilly child will probably find a lender will offer an unlimited line of credit provided that the parent is on the agreement. But otherwise, lenders like to see evidence that the main borrower has strong future earnings potential - if they can't afford the loan on their own income now, there should be reason to believe that they will be able to afford it in the not too distant future," he says.
Most lenders will add at most 30 per cent to 40 per cent to a loan amount because of the presence of a guarantor, Ferguson adds. This could still be the difference between renting indefinitely and making the big leap onto the first rung of the property ladder with a meaningful mortgage to their name.
A meaningful mortgage is a mortgage that gives househunters enough money to leave them within touching distance of the price of the pokiest shell of a property they can find in a location that doesn't involve exhausting the world's remaining oil supply on the way into work.
The average property price in Dublin is more than €350,000, according to the latest available Permanent TSB house price index. Someone who works in the capital and qualifies for a loan of say, €180,000, might well be prepared to commute. But the average price of property in the commuter counties of Louth, Meath, Kildare and Wicklow is almost as intimidating at just over €280,000.
Persuading a parent to act as a guarantor, or accepting their kind offer of a guarantee, could be the answer to their problems.
Not everyone can act as guarantor, however.
"Age is the biggest consideration. Most lenders look for the guarantor to be under 60," says Leonard.
"If they're not earning any income apart from maybe a small pension and the State pension, it isn't adding much to the equation for them to act as guarantor and people need to think about this before they offer up their parents as guarantors," Dowling says.
"I have this friend" is not a line that mortgage lenders want to hear. "The guarantor needs to be a father or a mother, or in some cases a brother or a sister. In the vast majority of cases, a friend is not acceptable to the banks."
But is acting as a guarantor on a child's loan a risky business?
Most of the time, there are no problems, but Dowling believes that guarantors should avoid guaranteeing the entire loan if they can help it.
Some lenders have a clause called "all sums due" in the guarantee document, which means that they are liable to repay the full mortgage if a default occurs. Other lenders require the guarantor to guarantee only the part of the loan that the borrower could not qualify for in their own right.
"In the cases of couples, both sets of parents should guarantee the loan if they are both in a position to do so. I don't think it's fair that one person's parents guarantee the loan."
This can help avoid a heavy financial burden falling on one set of parents if the couple later has problems making repayments. If the relationship breaks up and one set of parents has stepped in to meet repayments, there could also be complications if the other partner decides they want to sell the house.
"It is a serious thing to do," says Dowling.
"There is a human side to it. There's a relationship and there's a parent trying to help a child. Everybody should look into the implications."
How parents can help
• Guarantors will be required to sign legal documents obliging them to repay a loan if the mortgage holder defaults. They are particularly common in cases where there are single applicants with income not high enough to qualify for a mortgage on their own.
Anyone acting as a guarantor should ensure they know exactly the value of the loan they are agreeing to repay: an "all sums due" clause could mean that they are liable for the full mortgage and any other personal loans with that lender if their child was to default.
• Lenders sometimes seek additional security by asking the parent or parents to put their names on the mortgage documents.
Earlier this year, the Revenue Commissioners said these co-lending arrangements would lead to the loss of borrowers' first-time buyer status, meaning that they could face a higher stamp duty bill where a lower sum or none at all was due before.
However, the Revenue now accepts there will be no loss of first-time buyer relief under the following conditions: If the transfer of the house is taken in the name of the child; if it is the intention that the parent is not to take a beneficial interest in the house; if the parent has been written into the mortgage solely at the request of the lender, and if it is not intended that the parent will be contributing to the repayments in the normal course of events.
• The boom in house prices means many parents are living in properties where the selling value far exceeds their outstanding mortgage. It is this phenomenon that has encouraged the growth of sizeable deposit gifts to children, as established homeowners can apply for top-up loans and use the money to pay for their child's deposit.
However, lenders often charge substantial legal fees for top-up loans. Borrowers who are nearing the end of their working lives should also think twice about taking on additional borrowings, especially when their own home is at risk if they can't meet their new, higher mortgage repayments.