Government-introduced property schemes or tax exemptions might be lowering barriers to home ownership in Australia, but without a substantial amount of savings in the bank, buying a house could still prove difficult. So how could you kick your FOMO to the curb and still buy a house if you haven’t saved enough for a deposit? One option is to get a family guarantee.
In this article:
- What a family guarantee is
- How it works
- How it can help you purchase a property
- Who can be your guarantor
- The risks and benefits of using family security
I’m hooked… What is a family guarantee?
A family guarantee, commonly referred to as a parental guarantee, is a type of property guarantee that can increase your chances of qualifying for a home loan when you don’t have a substantial deposit.
So how does it work?
Let’s break it down. It works by using an asset – usually a house – owned by a family member as additional “security” for your loan. A security in this sense is a valuable asset that can be possessed and sold by your lender if you default on your loan repayments. Since the property you purchase is usually considered to be security for the loan you take out, having a guarantor can reduce the risk to the lender, making you an even more attractive borrower.
How can the family guarantee help me?
Well, let’s say you’ve saved for a deposit but you’re short on funds. The amount you need to borrow is almost equal to the property value, meaning you will have a high loan-to-value ratio (LVR). If you proceed, you will have to pay thousands of dollars in Lender’s Mortgage Insurance (LMI).
However, if a family member, let’s say your parents, own or have a substantial amount of equity in their home, they could guarantee you and use a portion of their property as security for your loan. Since their contribution takes the place of your missing funds, the LVR for the property you wish to buy could be reduced and so could the amount of LMI you would have to pay.
I think I get it, but who can be my guarantor?
Despite being called a “parental guarantee” anyone can actually be a guarantor, as long as they meet certain age and citizenship criteria, have equity or a stable income, or have a good credit rating. However, banks and lenders often refer to it as a family guarantee because immediate family members such as parents or siblings are usually the ones to guarantee their relative’s home loan.
Should myself or my guarantor know anything else?
As a borrower, you should ensure that you can afford the loan and its respective repayments to not put your family member or their household at risk. The guarantee only aims to reduce barriers to entry or the need to pay extra fees like LMI, and won’t assist with the repayments itself.
Given the risk involved it’s best practice to seek out proper financial advice and do thorough research before each party commits to anything. For instance, as a guarantor it is possible for you to choose how much money you would like to input as security and you can even request for a release as guarantor.
The most important point to takeaway is that while the guarantor can help you purchase a property, the act is not risk free. While using their home as security saves them from having to give cash to the borrower, the commitment stands that if the borrower cannot repay the loan, the guarantor will have to pay back the guarantee amount.
To sum all of the above up for you, essentially:
- A parental or family guarantee is when a relative offers to use their home as security for your loan.
- It doesn’t cost the guarantor (your family member) any money up front but instead relies on the value of their home and the equity they have.
- It benefits you because you’ll be able to borrow less which lowers your LTV (the ratio between your loan and the property’s value). Since the security from your family counteracts your deposit shortfall it lowers the chances that you’ll have to pay for LMI.
- There are still risks involved so only go down this route if you’re struggling to save for a deposit but are confident that you’ll be able to repay your loan.
Remember, right now there are a range of options out there to help you get a house, so even if this one doesn’t suit your needs, there may be other ways for you to purchase your dream home. Talk to us about your situation or book a consultation now so that we can help you out!
Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.