Wanting to buy your first home, but don’t have the deposit you need?
With increasing house prices, we’re seeing more First Home Buyers struggle to save the deposit they need to purchase their first home.
If you’ve found yourself in the same position, you may be able to buy your home sooner than you thought by using a family guarantee loan.
Family guarantee loans are only helpful when you’re capable of making all the repayments on the new loan yourself, it’s just that you’re a bit short with the deposit. They’re also helpful if you have parents (typically) who are willing and able to assist.
What is a family guarantee loan?
A family guarantee loan works by using equity in your parent’s property to help secure your new loan. This means the new loan is secured by your new property, as well as existing equity in your parent’s home. Being a ‘security guarantee’, in the majority of cases there is no reliance on your parent’s income (as guarantor) to support the loan.
Could it work for me and my family?
There are many parents who would like to assist their children purchase a property, but it can only work if there is sufficient equity available in the parent’s property.
The main factors are:
- The market value of the potential security guarantee property
- Existing loan(s) secured by this property (balance & redraw amount; limits on existing lines of credits)
- The lender on the existing loans
If the property is unencumbered (i.e. the property title is held with no finance facilities), then it’s pretty straight forward. The guarantors simply provide the certificate of title for the property, at the same time as signing the guarantor documents.
If there is finance owing against the guarantee property, there is a bit more to it.
An example
Let’s say the parental home is valued at $600,000 and the existing mortgage secured by this property is $250,000. A lender will generally allow borrowings up to 80% of the property value without charging Lenders Mortgage Insurance (LMI).
So, 80% of $600,000 = $480,000.
If we subtract the existing $250,000 mortgage, it leaves $230,000 in equity.
Some (or all) of this equity could be used as security to help you buy your first home. By placing a limited guarantee for a specific amount (or second mortgage) over your parents’ property, they could become security guarantors on your loan.
What else do we need to know about family guarantee loans?
Advantages
- You can get into the property market sooner
- By providing additional security, you may be able to borrow more and purchase a property with additional features
- The amount of savings you need to contribute can be reduced (or eliminated entirely), allowing you to conserve your cash for improvements or furnishings to your new home
- The additional security can help you to avoid LMI by keeping the overall borrowings at =<80% property value – this can represent significant savings
- You have the ability to release the guarantee over time by building up equity in your own property, reducing your loan amount, or both
Disadvantages
- Whilst guarantors are not liable for loan repayments, they may be liable for the ‘limited amount’ guaranteed if you (the borrower) fail to meet your loan repayments for an extended period of time. In our experience this is extremely rare, but something everyone needs to be aware of
- Whilst the guarantee is in place, it can reduce the guarantor’s ability to use the equity for other purposes. For example- if they are thinking of selling their property, you would need to release the guarantee prior to this occurring (& if LMI was required at this time, it raises the question of whether it was worth it to begin with)
If you want to know more about family guarantee loans and whether one might be suitable for you, just let us know. We’d be happy to help.
