A family guarantee is where a member of your immediate family, usually your parents, offers an additional security to the lower the Loan to Value (LVR) ratio on your property purchase.
This means rather than putting in more of a deposit, you are able to borrow more against the equity in your parent’s home or investment property, therefore avoiding Lenders Mortgage Insurance (LMI).
The lender providing the family guarantee then puts a mortgage on your parents’ property, making it part of part of the security for the new loan.
A family guarantee is most appropriate where
There are a number of factors which the bank will assess you and your parents on to determine if you are eligible for a family guarantee, including:
We will advise of how these factors impact you throughout our assessment process.
To determine if there is sufficient equity in your parents’ property, the bank will look at the balance of their current loan and order an independent valuation report to calculate the Loan to Value Ratio.
If their current loan, plus the additional borrowings from the guarantee loan, are less than 80% LVR of your parents’ property then the property is eligible for a family guarantee. Note some banks will have a lower LVR threshold e.g. 70% LVR.
Eligible guarantors are typically parents, but may also include: Adult child; Former Spouse; Grandparent; Guardian or Sibling.
Some lenders require your parents to be working, or alternatively self-funded retirees to provide a family guarantee. Other lenders do not, and only require there to be sufficient equity in the guarantor property.
Some lenders require your parents to demonstrate they can service the guaranteed portion of the loan (i.e. the portion above 80% LVR). Other lenders do not, and only test there is enough equity in the guarantor property.
You, as the borrower, are responsible for making the repayments on a loan supported by a family guarantee. That is, you are responsible for the whole amount borrowed under a family guarantee.
Under a family guarantee, the guarantors only provide a ‘limited guarantee’. This means if something goes wrong they are responsible for making sure the loan is paid back. However, if the property is sold, and the proceeds of sale are insufficient to cover the loan, the guarantors are only responsible for paying back the portion of the loan originally above 80% LVR.
Yes, extra steps include:
Most importantly, some lenders require the guarantors to seek independent legal advice to make sure the responsibilities of being a guarantor are completely understood.
Yes, some lenders may charge for the extra paperwork associated with documenting a family guarantee, plus the additional valuation on the guarantor 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.
Yes, you may think of a family guarantee as a temporary measure to purchase a property when you do not have a 20% deposit, and you would like to avoid LMI. You will be able to discharge the family guarantee, and release your parents’ property when the loan is paid down, or the value of your property rises, such that the LVR is 80%.