Read this before approaching the Bank of Mum and Dad

You've been saving up for a deposit and it feels like you're nowhere near getting into the property market.

You're thinking, 'I've got to wait another year or two to save enough!' But here's the thing: another way to get into the property market today that doesn't involve waiting is possible.

It's through taking advantage of what's called a guarantor home loan.

What is a guarantor home loan?

Let's say you're looking at a $500,000 property. With a 10% deposit, you'll need $50,000. Adding in the other upfront costs, you're looking at an additional $30,000 to $35,000, or more.

So realistically, to buy that $500,000 property, you're looking at needing $85,000 in total. For many people, that's going to take at least another 12 months of saving, and by then the property might be worth $550,000, which pushes you even further out of the market.

This is where the guarantor loan comes in. Instead of waiting and hoping, you can use this loan to fast-track your property goals.

A guarantor is someone - usually a close family member such as your parents or a sibling - who guarantees part of your loan by using the equity in their property. It's a way of saying, 'We'll back you up if you don't have the full deposit'.

Let's say you've found a $500,000 property but only have enough saved to cover either the deposit or the fees.

If your parents own a home worth $1 million with $500,000 in debt, they've got $500,000 in equity.

They could use a portion of that equity to guarantee your deposit. Banks won't let you use all the available equity; they'll generally give you 80%, which in this case would be $400,000.

Instead of asking your parents for cash, you can ask them to use their equity as a guarantee for part of your deposit.

How can parents use their equity towards your home deposit?

Here's how it works:

1. Go to the bank: The bank will check if you can afford the loan repayments.
2. Parents use their equity: Your parents (or a close family member) use a portion of their home's equity to guarantee your loan. They don't give you cash; everything is secured behind the scenes through the bank.
3. Use your savings for fees: Now that you don't need the full deposit, you can use the money you've saved for other costs, such as stamp duty, legal fees and inspections.
4. Buy the property sooner: Instead of waiting another year or two, you can enter the property market now and start building wealth through capital growth.

The big win here is avoiding opportunity cost - in this case, the cost of waiting while the market moves up and pushes you further out of reach.

By getting into the market now with a guarantor loan, you start benefiting from any price growth immediately.

What are the risks of using the Bank of Mum and Dad?

There are always risks, right? The biggest one with a guarantor loan is if you default on your repayments.

The person guaranteeing your loan (your parents, for example) will be on the hook to cover your repayments. So, you need to make sure you can actually afford the mortgage before you jump in.

You don't want to get stuck buying the wrong property. If the property doesn't grow in value, your parents' equity remains tied up and they can't use it for their own investments.

It's a serious responsibility for both sides, so discipline is key.

What are the pros and cons?

To help with the decision-making, let's weigh up the pros and cons of using a guarantor loan to buy your investment property faster, for you and the person offering the guarantee.

Let's start with the pros:

• Start investing now: You don't need to wait 12 months or more to save the full deposit.

• Use your savings for fees: Your hard-earned money can go towards stamp duty and other costs instead of sitting there waiting to grow.

• Build equity faster: By buying sooner, you start seeing the potential capital growth earlier.

• No cash exchange: The exchange is all done via the bank, so you avoid any awkward lending money conversations.

And now the cons:

• Risk to the guarantor: If you can't make your repayments, your guarantor is responsible.

• Choosing the wrong property: If the property doesn't grow in value, your guarantor's equity is tied up and can't be used for anything else.

• Discipline required: You've got to be confident in your ability to make those mortgage repayments.

What happens next?

Say you go ahead with the guarantor loan and your property grows in value over the next three to five years. You can go back to the bank and release the guarantor from the loan.

That means your parents can go back to their original financial position, and you've got a property that's hopefully grown in value.

A guarantor loan can be a game-changer if used correctly. You can enter the market now, avoid wasting time and start building your property portfolio. But it's not for everyone, so make sure you and your guarantor are aligned with your financial goals.

This is an edited extract from Retire filthy rich with real estate: Your step-by-step guide to building wealth through property by Ravi Sharma (Wiley $29.95).

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