The Family Guarantee For First Home Buyers
Written and accurate as at: Apr 04, 2018 Current Stats & Facts
THE FAMILY GUARANTEE FOR FIRST HOME BUYERS
More often than not, family love to help others members of their family if they think they can. This is especially true for parents or other close family when it comes to helping their children or other close family get out of the rental market and into their own homes.
Some might be willing but may not realise they are in a position to help. They may think they have to stand as guarantors for the entire loan, which can discourage some parents/family from being involved. Years ago if a family member went guarantor on a home loan they were required to guarantee the entire loan. However, it’s not like that anymore (thank goodness). So it’s definitely worth having the conversation because if you are willing to help there could be a way.
If a family member has equity in their own home, then they might be willing to go guarantor for a portion of their children or family members loan. They are not required to take out the loan in their name or to go onto the title of the property being purchased. It is simply a guarantee on a portion of the loan with the equity in their property as security on the home loan.
Usually the guarantee is for around 20%-25% of the property purchase price (not the whole loan). This can usually be released as soon as the children have at least 10% equity in your property through doing a refinance of the loan to release the family guarantee.
Generally, the person guaranteeing the loan needs to be related to the borrower in some way. Often this is parents, grandparents, aunties, uncles, siblings, etc.
The family guarantee means the person buying the property doesn't need to save a deposit at all as it allows them to borrow the full purchase price plus costs associated with the purchase.
This option also reduces some of the fees associated with the loan. For example, Lenders Mortgage Insurance is not payable when you are using a family guarantee.
The family member does need to understand that they are a “security” guarantor on the loan. This means that if the borrower doesn't make the payments on the home and there is a mortgagee in possession sale of the home by the bank or lender, then the family member may be required to cover any shortfall after the sale of the home up to the value of the guarantee. The full terms and conditions of a family guarantee are given to the family member prior to signing the agreement so that they fully understand the guarantee. It is highly recommended that they seek legal advice so that they fully understand their obligations of the family guarantee.
The banks/lenders still require the borrower to be able to afford the repayments so they will still be required to buy a property within their means. The lenders won’t allow anyone to buy a property that they cannot afford as that would not be responsible lending.
Not all of the banks/lenders give this option so it is worth speaking to us so we can introduce you to our dedicated mortgage broker Anita Marshall from Advanced Finance Solutions to explore the lender options available to you.
