What is a family guarantee?
A family guarantee is typically a means by which parents can support their child in getting onto the property ladder by using the equity in their home to reduce the size of a cash deposit and / or avoid the need to pay Lenders Mortgage Insurance (“LMI”).
Read on to understand what this means for you.
LMI is generally payable when you borrow more than 80% of a properties value. However, there are some exceptions as outlined in my earlier article How to avoid LMI.
As a first home buyer, one way you can avoid paying LMI is by involving your parents via a family guarantee.
A family guarantee requires your parent(s) to offer equity in a property which they currently own to reduce the overall loan to value ratio (“LVR”) to below 80%.
For example, assume you would like to purchase a property for $600,000.
To avoid paying LMI, you would typically need a deposit of $120,000 + costs of say $30,000 or 5%. However, instead of a $150,000 deposit you only have a $50,000 deposit. However, your parents own their own home outright and it is worth $800,000. If your parents were happy to use their house as security for your loan, this would bring the overall LVR to below 80%.
In addition to saving on LMI, key benefits of involving a family guarantee include,
- you may not need a deposit to purchase a home helping you purchase sooner,
- the ability to borrow 100% of the purchase price + costs providing surplus funds to complete cosmetic renovations,
- utilising equity in parents property to get onto the property ladder,
- family guarantee is limited only to that portion of the loan which is greater than 80% of the purchase property’s value,
- the family guarantee can be released when,
- the loan is paid down such that the LVR reduces to 80% and / or
- the property value increases such that the LVR reduces to 80%.
Before parents (guarantor) agree to provide a family guarantee they need to be aware that,
- they will be liable for repaying that portion of the loan above 80% LVR should you, the primary borrowers default on your obligations,
- it will be necessary to gain an understanding of the guarantors financial position to ensure they are in a position to offer the guarantee,
- independent legal and financial advice may be required and
- a mortgage will be registered on the title of the guarantors property.
Whilst there are plenty of lenders who allow a family guarantee for first home buyers, there are only a handful of lenders who allow this for investors and second home buyers.
As always, lenders have different policies, terms, interest rates and fees so it is important to make sure you seek advice from a finance professional to make sure you get a loan that is suited to your personal circumstances.
We can help you understand your options so make sure you contact us for assistance. Simply email us at email@example.com or call 1300 955 759 — together we’ll uncover your best option.
Invest wisely, borrow carefully, and sleep comfortably.