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Guide to family guarantee

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Making the decision to buy your first home and climb the property ladder is an exciting one. You’re finally ready to move out of your parent’s home into your own, or maybe you’re tired of renting and ready to find a place to call your own.

The first step to take in purchasing your home is to save for a deposit, which is generally 5-10% of the purchase price.

With the cost of living and the cost of housing increasing, saving for a deposit can seem like it might take a lifetime. Sometimes asking a family member for a gift or a loan isn’t an option. This is where the Family Guarantee comes in.

What is the Family Guarantee and how does it work?

The Family Guarantee allows you to be in your first home sooner, as it reduces the amount of money you need to save for a deposit. By using the equity in a family member’s house, the family member provides a guarantee to secure a loan on a property you are buying. It allows the guarantor to choose the amount they wish to provide as guarantee for your loan, limiting the amount to a portion of your borrowings, not the total amount borrowed.

Who can apply for a Family Guarantee?

A family guarantee isn’t just for first-time buyers. It can also be used if you’re looking to upgrade your home while avoiding costs such as Lenders Mortgage Insurance. A family guarantor also doesn’t have to be your parents; it can be a grandparent, sibling, step-parent or even an in-law. Typically the family guarantor’s mortgage would need to be with the same lender.

What are the advantages of a Family Guarantee?

With a Family Guarantee you’ll be able to get on to the property market a lot faster, as you won’t need to save for a full deposit.

A Family Guarantee can help to reduce your buying costs by cutting out or reducing the Lenders Mortgage Insurance, or LMI. Usually, buyers will need to pay LMI as protection to the lender if they are borrowing more than 80% of the property value. This can add up to be a big cost. However, if you have a guarantor for your loan, you can reduce the borrower’s loan to value ratio, meaning that you may be able to avoid LMI.

What are the pitfalls?

Like with all loans, there are some risks. It is your responsibility as the borrower to make repayments on the full amount of your borrowings and not your guarantor. However, if you were to default on your loan repayments, then your family member, the guarantor would be liable to repay the guaranteed portion of your loan. We advise guarantors to seek independent legal advice before they enter into a loan agreement.

It’s important to understand what your monthly repayments will be before entering any loan agreement or signing for a house. Use our handy home loan calculator to understand your loan repayments.

When can a guarantor be released?

Once the homeowner pays off the home loan that is guaranteed, the guarantee is released and there is no longer any responsibility left on the guarantor. You may also be able to apply for the guarantee to be removed when your loans are less than 80% of the value of your property (the time this takes can vary and will depend on how much the property appreciates in value and also the any extra repayment you as the borrower can make).

Our friendly team is more than happy to guide you on every step of the way. Enquire today to begin your journey to becoming a home owner.

This article is intended to provide general information of an educational nature only. It does not have regard to your objectives, financial situation or needs and must not be relied upon as financial product advice. Before you act on this information, you should consider whether it is appropriate for your circumstances. Information in this article is current as at the date of publication. Applications subject to credit approval and fees and charges are payable. Terms and conditions apply and are available on request.

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