What is a Family Guarantee or Limited Security Guarantee Loan?
A Family Guarantee Loan is where a family member – usually your parent(s) – use equity in their property to help you purchase your new home.
A Family Guarantee Loan allows you to buy property – without needing a large cash deposit saved. In some cases, you don’t really need much in savings at all.
A Family Guarantee Loan also allows you to avoid paying Lenders Mortgage Insurance, because your total borrowings are less than 80% of the total security offered to the lender.
Since you’re offering more security (i.e. the value of your new property plus equity in your parent’s home), you can often borrow the full purchase price plus some of purchase costs and still keep to the maximum 80% Loan to Valuation Ratio (LVR).
How does a family guarantee loan work?
The easiest way to explain how a family guarantee loan works is with an example.
Say you’ve found a property for $525,000, but you haven’t got much of a deposit saved.
A lender won’t allow you to borrow $525,000 using only your new property as security, because lending you 100% of the total security value presents them with an unacceptable risk.
So we have two options.
The first is to lower the amount you want to borrow. But this is a little hard if you don’t have enough in savings and you really want the house!
The second is to offer the lender more security, which in turn allows you to borrow a higher loan amount.
Let’s go back to our example.
Purchase price is $525,000. If you were to borrow 80% of this value to avoid Lenders Mortgage Insurance, you would have a loan of $420,000.
But this leaves you $105,000 short, and we haven’t even considered the purchasing costs.*
Let’s say your parents own a property worth $700,000 and have no loans secured against it.
Sticking to our 80% Loan to Valuation Ratio (LVR), this means there’s $560,000 of available equity in your parents’ home ($700,000 x 80% = $560,000).
A portion of this available equity could be used to secure the additional $105,000 you need to purchase your new home.
Security offered for family guarantee loan:
Purchase Security Value (from new property): $525,000
Additional Security (from parent’s property): $131,250 – note this is only part of the equity available in your parent’s home
Total security offered for new new loan: $525,000 + $131,250 = $656,250
80% loan amount based on total security value offered: $656,250 x 80% = $525,000
By increasing the total value of security offered to the lender, you’ve been able to increase the loan amount to provide the funds you need buy the property.
How will this impact my parents?
The guarantee provided by your parents is limited to the guarantee amount – in this example, it’s $131,250. Your parents are not required to hand over $131,250 cash to the lender, nor will they need to start making repayments on a new $131,250 loan.
What it means is that in the unlikely event you had issues with your loan repayments – and it got to the point where the lender needed to recover funds above what your own property property was worth at the time – if the guarantee was still in place, the lender would have the right to recover $105,000 from your parents.
A mortgage is established on your parents’ property as part of the family guarantee loan process, which does limit their options if they were planning to sell their property. If your parents wanted to release equity for other purposes or potentially help your siblings buy property too, this can still be possible depending on the lender’s policy at the time.
Does the Limited Security Guarantee stay on my parents home forever?
No.
The way the loan is structured is that there are generally two loans.
One larger loan secured solely by your new property purchase. And a second loan secured by your new property and a portion of your parent’s property.
When your loan balance equals 80% of the value of your property only, we can request the lender to release the limited guarantee and solely use your property as security for your home loan.
You get to this point a few ways.
1. By paying down your loan.
2. Your property increases in value.
3. Both 1 & 2 happen at the same time.
Will a Family Guarantee Loan work for my situation?
It depends on a few things.
Firstly, there needs to be enough equity in a property owned by your parents. If your parents have an unencumbered property, it can be a straight forward process depending on the lender. If your parents have a loan against the property, there’s a bit more to the calculations, but it’s generally still possible.
Secondly, there are eligibility requirements that need guarantors need to satisfy and these vary from lender to lender.
And finally – and perhaps most importantly! – your parents need to be open to the idea.
You can download a copy of our Family Guarantee Factsheet here.
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*To make things a bit simpler for illustrative purposes only, we have not factored in purchasing costs like stamp duty/conveyancing duty and we have assumed that any savings accumulated by the buyer in this example are sufficient to cover the purchasing costs involved. However, some lenders will allow you to borrow enough funds to cover the purchase price and purchasing costs involved.
