October 4, 2024
What is a Family Guarantee?
A FamilyGuarantee is a financial arrangement where a family member—typically a parent—uses the equity in their own property to act as security for part of the buyer’s home loan. This provides a safeguard to the lender, reducing their risk and enabling the borrower to secure a home loan without needing to save for a full deposit.
InAustralia, most lenders offer Family Guarantee options. These guarantees allow home buyers to borrow up to 100% of the property’s value, and in some cases, additional costs like stamp duty can also be covered.
How Does it Work?
Under aFamily Guarantee arrangement, the family member’s property is used as security for a portion of the loan, often around 20% of the purchase price. This guarantees that the lender is protected if the borrower defaults on their repayments. In essence, it eliminates the need for the borrower to pay Lenders Mortgage Insurance (LMI), a common extra cost that typically applies when borrowing more than 80% of a property’s value.
For example, if a borrower is looking to purchase a home worth $500,000 but only has a $20,000 deposit, a parent could use equity in their own home to secure the remaining 20%, or $100,000. This would allow the borrower to avoid LMI and potentially access a better interest rate due to the reduced risk for the lender.
Advantages of a Family Guarantee
One of the key benefits of a Family Guarantee is that it helps borrowers get into the property market sooner, without needing a large deposit. By reducing or eliminating the need for LMI, buyers can save thousands of dollars. Additionally, by having a family member provide a guarantee, the borrower may gain access to more favourable loan terms and interest rates.
Another advantage is the potential to borrow more. With the backing of a Family Guarantee, buyers may have higher borrowing power, which could help them secure a home in a more desirable area or purchase a larger property.
Risks and Considerations
WhileFamily Guarantees can be incredibly helpful, they are not without risks. For the family member providing the guarantee, it’s important to understand that they are legally responsible for the guaranteed portion of the loan if the borrower defaults. If the borrower is unable to make repayments, the lender may request repayment from the guarantor or, in the worst case, sell the guarantor’s property to recover their funds.
Both parties need to carefully consider their financial situation and seek independent legal and financial advice before entering into a Family Guarantee arrangement. The guarantor should ensure they have sufficient equity and a comfortable financial buffer in case unforeseen circumstances arise.
Conclusion
A FamilyGuarantee can be a valuable tool in helping first-time buyers secure a home loan and enter the property market sooner. However, it’s crucial that both the borrower and the guarantor fully understand the responsibilities involved. By doing thorough research and seeking professional advice, families can use this option to achieve home ownership while minimising risks.
