Family pledge & family guarantee home loans

Get into the market with a guarantor home loan

For many first home buyers, saving the deposit you need for a home loan could take several years. Of course, by that time house prices may well have increased even further beyond your reach, so how can you find a way to get into the property market?
The Federal Governments new First Home Loan Deposit Scheme has helped some First Home Buyers enter the market, however the need to save the 5% has meant that home ownership is still out of reach for many. Queue the family pledge home loan. Also known as family guarantee home loans and guarantor home loans, these types of mortgages allow you to make up for the fact that you don’t have a sufficient deposit saved by using the equity in a family member’s house as security on your loan.
There are plenty of advantages and a few potential drawbacks to family guarantee home loans, so read on to find out whether they’re right for you, or reach out and we can explain.
What is a family guarantee?
A family guarantee is a type of guarantee that can be made to secure a property. This is done by securing the deposit shortfall to a property owned by the guarantor, such as your parents or a close family member. It is also known as a guarantor home loan.
How does a family guarantee work?
A family pledge allows you to use the equity in your parents’ property or another family member’s property as security on a home loan. Guarantors are limited to immediate family members, including parents, grandparents and siblings.
While it was once standard practice to guarantee the entire loan and put your home on the line, today the security on the new home loan can be split and you can limit your guarantee. For example, the equity in your parents’ property may be used as security for 20% of the loan, while the property you are purchasing will be used as security for the other 80% of the loan. So if you’re helping your kids purchase a property for $500,000, your 20% guarantee is only $100,000.
• How much do they have to guarantee? A common strategy is to guarantee enough equity so that the borrower avoids paying Lenders Mortgage Insurance. A parent will need to guarantee 20% of the purchase price of the new property if the borrower has no deposit.
• What can be bought with a family guarantee? The family guarantee can be used to buy a home or invest in residential property.
What are the benefits?
The family guarantee will allow you to:
• Access finance. Most loans will have a minimum deposit that will have to be paid upfront in order to be accepted. This will usually be around 20%, or less if you pay LMI. With a family guarantee you may be able to borrow more money and provide less of a deposit which will allow you to buy a home sooner.
• Avoid LMI. Borrowing more than 80% LVR usually requires you to take out lender’s mortgage insurance, but a family guarantee means this extra expense can be avoided.
• Increase borrowing power. A family guarantee can boost your borrowing power. The family guarantee will often be used to cover a deposit that can't be paid so you will be able to borrow close to 100% of the loan in some cases if properly secured. Often, guarantor borrowers can borrow 100% of a property value plus costs.
• Eligible for FHOG. Taking out a family pledge home loan means you are still eligible for financial assistance through the First Home Owners Grant. In addition, it also means you will be eligible to access most mortgage products from a lender.
• Limit your guarantee. While the traditional approach is to guarantee the full loan, in many cases you have the option of guaranteeing just a portion of the loan, for example 20%. Once the standard LVR requirements of the loan product have been met due to loan repayments being made or a rise in the valuation of the home, the guarantee on the loan is released.
What are the drawbacks?
• Putting the family home at risk. If you’re the guarantor you could be putting your family home at risk, so consider all your options before choosing this approach.
• Not receiving expert advice. If you’re considering applying for a family guarantee home loan, it’s important that you seek out independent financial and legal advice first. You need to understand exactly what the guarantor will be liable for in the event that you default on the loan.
• Not all banks offer family guarantees. Family pledge home loans aren’t offered by all lenders, so the best thing to do is approach a mortgage broker for advice tailored to your needs.