When you’re desperately trying to save up a deposit for a home and just see the prices of property climbing and climbing, it’s difficult to remain patient. But there is another way: A guarantor can help.
If you don’t have a deposit or enough savings to purchase a property, a family guarantee allows you to secure the deposit against a property owned by your parents. It’s also known as a guarantor home loan. In this situation, a relative or friend (usually a borrower’s parent or parents) is prepared to use the equity in his or her own home to guarantee the deposit of the borrower.
You can use a family guarantee to help buy a home or residential investment property – Listen to me explain this for you here
Let’s look at an example of them buying a $400,000 property.
Normally they would need to have saved up at least $20,000 deposit PLUS the stamp duty and legal costs. And if they can find a bank to lend 95% of the value, they would also be paying would pay about $11,000 Mortgage Insurance.
Where a family guarantee can help.
It works like this – say your kid wants to purchase a property for $400,000. Say they have enough money saved to cover the stamp duty and legal costs. Obviously they need to borrow the full $400,000.
Let’s say parents have a property worth $500,000 which they own outright. They would guarantee $80,000 equity in their home which then acts as the deposit for the child’s purchase. The loan of the full $400,000 is in the child’s name only and they don’t have to pay the mortgage insurance, saving them $11,000. Parents guarantee is for $80,000 only.
Parents will need to sign bank papers, provided information and your title to the bank and possibly get legal advice. Not all banks allow family guarantees, so best to see a good mortgage broker. Not every situation suits a family guarantee and beware, family guarantee policies are very different at each bank, so again a good mortgage broker will work out which one suits your situation.
**Common Guarantor Structure**
Advantages of using a guarantee loan
- You are able to buy a home sooner (now) rather than waiting years to save enough deposit
- Using a guarantee avoids having to pay any Lender’s Mortgage Insurance (LMI)
- Allows your child to buy in a more desirable location and a home that is better suited to their needs
The risks
You may want to help your child but it’s important you don’t go into the transaction blindly.
- Guaranteeing the loan depending on the structure of the guarantee, you could be liable should your child default on the payments, either by taking over the repayment schedule or handing over a full repayment.
- If you can’t make the payments, the lender may sell the home used as security. If this is still not enough, the lender may also require you to sell assets to meet outstanding debt.
- Another major risk is a bad credit rating if default occurs.
- if you need to borrow money for another purpose, the guaranteed equity cannot be reused to buy an investment property etc.
Minimising the risk
There are ways to minimise the risks.
- Use a monetary gift or private loan instead. This involves borrowing money against your property in your name, and then gifting it to your child. You should have a legal agreement in place.
- Another way to avoid the risk is to buy the property jointly with your child. This means your name is on the title and you have a certain percentage entitlement.
- When it comes to guaranteeing a loan, it’s always sensible to speak to a professional. You should also consider asking a legal professional to draw up a formal loan document outlining all conditions of the loan, interest rate and expected repayments.
- Finally, outline an exit strategy. Financial situations change and as the loan decreases with repayments, there may be an opportunity for you to withdraw your support to free up your assets without impacting your child’s loan.
Some of the Frequently Asked Questions
Can I still do this when I haven’t fully paid off my place?
This is possible provided both your loan and your child’s new loan will need to be in a bank and the guarantee debt doesn’t exceed 80% of the value of your home.
How do you remove the family guarantee?
Once the new purchase has increased in value to $375,000 you can ask for the guarantee to be released as your property is no longer needed as security. This will take 3 years on average.
What if my child defaults on the loan?
If something goes wrong – the bank will sell your child’s home first before activating the guarantee. Even if this did happen your liability is limited to $80,000 NOT the full house. The loan remains in the kids name even though it is “located” on your property.
I have more than one child, can I have more than one family guarantee?
Yes, provided you have the equity in your place and provided everyone borrows at the same bank.
Can I sell the property if it still has a guarantee on it?
Yes, you will be able to sell and move to a new property however the guarantee will also transfer across to the new property. This is what the banks call a “security swap”, we will be able to arrange this for you
