How does a family guarantee work?

As the price of property surges across Australia, so does the cost of getting into the property market for many first home buyers.

For the most part, if you’re wanting to get a home loan from a bank or lender, they will require you to come up with a deposit. Depending on the lender, this can be anywhere from 5-20%. With house prices continuing to climb, many first home buyers get stuck in the trap of trying to save money for a deposit, only to watch house prices increasing in value and leaving them behind.

Fortunately, there are ways first home buyers can get into the market more quickly and with a lower deposit to ensure they don’t miss the opportunity to enter the market.

One of the most popular options for many first home buyers is to use a ‘Family Guarantee’ or ‘Guarantor Loan’.

A family guarantee effectively uses the equity in another person’s property to account for a portion of your deposit. The most common situation is when parents use the equity in their home to help their children buy their first home.

In practice, it is possible to use the equity in a family member’s home to cover the 20% deposit for the purchase of a property. The balance of the loan is then secured against the property you are buying.

It’s also worth noting that the person or persons that act as a guarantor can limit their guarantee to only that portion of the loan. In the example of parents putting up the 20% deposit through their equity, they would not be liable for the full value of the property. However, this is something you should speak to your mortgage broker about.

When you use this type of strategy, it is possible to effectively get a high loan-to-valuation ratio (LVR) without the need to pay lenders mortgage insurance (LMI). LMI is a form of insurance that is in place to protect the lender, and the borrower is required to pay it when they are borrowing more than 80% of the value of the property.

LMI can run into the tens of thousands of dollars and is a significant cost that borrowers need to manage if they intend to access a loan with an LVR above 80%.

The other advantage of using a guarantor-type loan is that first time buyer mortgage broker are still able to access the various first home buyer grants. For many first home buyers, the ability to access the various grants and also be exempt from stamp duty is the real reason why they are able to get into the property market.

In recent times, first home buyers have been able to access other programs such as the First Home Loan Deposit Scheme (FHLDS), which operates in a similar manner and where it is the government that effectively helps guarantee higher LVR loans. However, there are price caps on the properties you can purchase, and the program is limited each financial year.

While using a family guarantee is a great way for first home buyers to get into the property market, it is still not without its risks. The guarantor is putting their property at risk should the borrower default on their payments.

It is vital that you speak with your mortgage broker and get professional advice before deciding to go down the path of using a family guarantee or guarantor home loans Australia.

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