We have helped hundreds of home buyers get into the property market and know how hard it can be to save your initial deposit. A family guarantee can help you get into the market property sooner by utilising the equity in your parents’ property to make up the shortfall in your savings and help you avoid paying LMI. We will advise you which lender is right for you, as well as your parents, and make the process as easy as possible for the entire family.
What is a family guarantee?
A family guarantee is where a member of your immediate family, usually your parents, offers an additional security to 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 the security for the new loan.
How do I know if a family guarantee is right for me?
A family guarantee is most appropriate where:
- You are a relatively high income earner and/or the property is modestly priced
- Your savings are less than a 20% deposit plus stamp duty and transaction costs
- Your parents are financially independent, and if possible not reliant on government welfare
- They have a home or investment property with no debt or relatively low debt outstanding
How do I know if my family and I are eligible for a family guarantee?
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:
- Your borrowing capacity
- The equity available in your parents’ property
- Which bank your parents property is currently mortgaged to
- The financial position of your parents and their sources of income
- Your parents’ ability to manage any outstanding debt should the bank have to claim on the guarantee
We will advise on how these factors impact you throughout our assessment process.
How do I know if there is enough equity in the guaranteed property?
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.
Who can provide a family guarantee?
Eligible guarantors are typically parents, but may also include:
- Adult child
- Former Spouse
- Grandparent
- Guardian
- Sibling
Do my parents need to be working?
Some lenders require your parents to be working or, alternatively, to be self-funded retirees to provide a family guarantee. Other lenders only require sufficient equity in the guarantor property.
Is the borrowing capacity of my parents assessed?
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.
Who is responsible for repaying a family guarantee loan?
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.
What are my parents responsible for if something goes wrong?
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.
Are there any extra steps for a family guarantee loan?
Yes, extra steps include:
- Making sure the guarantors are eligible to provide a family guarantee
- Verifying there is sufficient equity in the guarantor property
- Identifying the guarantors
- Assessing the financial position of the guarantors
- Making sure the guarantors understand the legal implications of providing a guarantee
Most importantly, some lenders require the guarantors to seek independent legal advice to make sure the responsibilities of being a guarantor are completely understood.
Are there any extra costs for a family guarantee loan?
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.
Can I discharge the guarantee at a later date?
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 increases, bringing the LVR to 80%.