Family Guarantee Loans
Entering the property market is no easy feat for a first home buyer. If you’re trying to save up a deposit and all you can see is the price of properties increasing, it’s difficult to remain patient. Parents who aren’t prepared to hand over cash for a deposit can still help their children by acting as a guarantor. With the help of your guarantor you can enter the property market much sooner, by utilising the equity in your parents property you can also avoid lenders mortgage insurance.
A family guarantee is where a member of your immediate family, usually your parents, offers an additional security to lower the loan to value ratio on your property purchase. Rather than putting in more of a deposit, you’re able to borrow more against the equity in your parent’s home or investment property. The lender that is facilitating the family guarantee then puts a mortgage on your parents property, making it part of the security for your new home loan.
If you would like to get a better idea of your borrowing power and what your likely repayments might be, try our Borrowing Power Calculator and Loan Repayment Calculator.
Common guarantee types
If you don’t have a substantial deposit for a home loan, there are two types of guarantees available to borrowers. Servicing guarantees are more complex and less common than security guarantees. Servicing guarantees involve a family member guaranteeing all of the repayments on a home loan, as well as being named on the property title. A drawback of this approach is that it usually means first home buyers are not entitled to any government grants.
The most popular option is a security guarantee, it is commonly referred to as a family guarantee. Borrowers who have a limited deposit often use this approach. This type of guarantee requires parents use the equity in their own property to guarantee the deposit of the borrower. This option works very well when the borrowers don’t have a substantial deposit, but their parents own a significant proportion of their own home. It’s a great option, as long as the parents are confident with their child’s ability to pay back the home loan.
Implications for guarantors
Rising house prices are making it incredibly difficult to enter the housing market. It’s no secret that it can take a long time to save a deposit. As much as you would like to help your child enter the property market, it’s important you don’t go into the transaction blindly. Parents should be aware that acting as a guarantor will affect their borrowing capacity, and possibly their lifestyle in retirement. When it comes to guaranteeing a home loan, it’s always sensible to speak to a professional and outline an exit strategy with the prospective borrowers.
Being a guarantor generally means using the equity in your own property as security for your child to purchase their own property. You need to be in a strong financial position and have enough equity in your own property to act as a guarantor. The first thing that you should consider is whether or not you are in a financial position to pay off your portion of the loan, should the borrower run into difficulties and find that they can no longer make the repayments.
Depending on the structure of the guarantee, you could be liable should there be repayment defaults - either by taking over the repayment schedule or handing over a full repayment of the guaranteed portion. If you can’t make the repayments, the lender may sell the home that is used as security. If this is not enough, the lender may also require you to sell assets to meet the outstanding debt.
There are ways to minimise the risks for guarantors. The most common is using a monetary gift or private loan – a common strategy is to borrow money against your property, and then gift it to your child. Another way to reduce the risk is to buy the property jointly with your child. This means your name will be on the title and you have a percentage entitlement.
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FAQs
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A family guarantee is an appropriate option when:
You are a relatively high income earner and the property you want to buy is modestly priced
Your current savings are less than a 20% deposit plus stamp duty and transaction costs
Your parents are financially independent, and if possible not reliant on government welfare
Your parents have a home or investment property with no debt or relatively low levels of debt outstanding
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There are a number of factors which the lender will assess to determine if you are eligible for a family guarantee, this includes:
Your borrowing capacity
The equity available in your parents property
Which lender your parents property is mortgaged with
The financial position of your parents and their sources of income
Your parents ability to manage any outstanding debt should the lender have to make a claim on the guarantee
Your trusted Mortgage Broker will be able to advise you on your suitability for a family guarantee home loan.
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To determine if there is sufficient equity in your parents property, the lender will look at the balance of their current loan and order a valuation report. If their current loan, plus the limited guarantee are less than 80% LVR of your parents property then the property is eligible for a family guarantee. It is important to keep in mind that some lenders might have a lower LVR threshold.
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Eligible guarantors are typically parents, however they may also include former spouses, grandparents, guardians or siblings.
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Some lenders will require your parents to be either employed or self-funded in retirement. However, other lenders only require sufficient equity in the guarantors property to provide a family guarantee.
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Some lenders will require your parents to demonstrate that they can service the guaranteed portion of the home loan, this is the portion above 80% LVR. However, other lenders only assess that there is enough equity in the guarantors property.
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The home loan borrowers are responsible for the entire amount borrowed, this includes the associated repayments on the home loan supported by a family guarantee.
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Under a family guarantee, the guarantors only provide a limited guarantee. If your property needs to be sold, and the proceeds from the sale are insufficient to cover your home loan, the guarantors will only be responsible for paying back their portion of the loan which was originally above 80% LVR.
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Yes, the extra steps often include the following:
Identification of the guarantors
Making sure the guarantors are eligible to provide a family guarantee
Verifying there is sufficient equity in the guarantors property
Assessing the financial position of the guarantors
Making sure the guarantors understand the legal implications of providing a guarantee
Some lenders will require the guarantors to obtain independent legal advice, this ensures that they understand the responsibilities of being a guarantor.
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Yes. Some lenders may charge for the extra paperwork associated with documenting a family guarantee, plus the additional valuation on the guarantors property. There are also charges for registering a mortgage on your parents property and refinancing it where required. If independent legal advice is required, this is another additional cost.
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Yes. You should think of a family guarantee as a temporary measure to purchase a property. You will be able release your parents property when your home loan is paid down or the value of your property rises, typically this occurs when the LVR is below 80%.