To calculate the limited guarantee, you first need to know the value of the property you child is buying.
It’s calculated as:
Step 1: Calculate 25% of the value of their property
Step 2: If your child has a deposit you can deduct this amount from the above 25%
n.b. the additional 5% is an estimate to cover stamp duty and legal costs involved in the purchase. If stamp duty is not payable, say for example there may be First Home Buyer benefits avaliable, then then you would deduct this form the calculation. It is a bit of an overestimate but a good rule of thumb.
As an example, let’s assume your child has a $20,000 deposit and they are buying a home for $500,000.
House cost: $500,000
Stamp duty and legal costs: $25,000
So, the total cost to buy this property is $525,000
This means without a deposit your child would need to borrow $525,000
- the limited guarantee will be: $500,000 *25% = $125,000
But, they have $20,000 in savings
In this case they only need to borrow $505,000
- the limited guarantee will be: $125,000 – $20,000 = $105,000
Keep in mind that every bank has different ways to calculate the limited guarantee and this is a good rule of thumb. Please talk to the Home Loan Guy for more details.