You could be mistaken for thinking that a family guarantee is some sort of Mafia loyalty pledge – but it’s actually a really smart way for first home buyers to buy their first home.
Everyone knows how difficult it can be for first home owners to save a deposit – and then there’s Lender’s Mortgage Insurance (find out more in my blog) to pay.
There is another way! A Family Guarantee is basically parents, or grandparents, guaranteeing that they will cover the bank’s losses should the buyer default on their loan. You may also hear ‘Parental Guarantee’, ‘Family Pledge’ or ‘Limited Guarantee’ all of which mean the same thing.
What are they guaranteeing?
The person giving the guarantee is basically saying that, if the person buying their home defaults, then they promise to cover the debt.
How it works
Example:
- You buy a house for $400,000
- You borrow from the bank $400,000
- Family guarantee $80,000
The guarantee, usually ‘secured’ against the family member’s home, is 20% of the cost of the house, avoiding the need to pay Lender’s Mortgage Insurance, or save a deposit. So, the property ladder is no longer out of reach. The family member will be known as ‘the guarantor’. This a ‘limited’ guarantee – limited to $80,000 in the example above. It’s important for the first-time buyer to make the loan repayments, as their parents would probably be pretty unhappy if they didn’t! For this reason, banks will still do a thorough check to make sure the borrower can afford the monthly payments.
What’s at risk for the guarantor?
If the borrower defaults, and the property has to be sold, then in our example, the bank can claim up to the $80,000 guarantee if they make a loss. The amounts would change for different purchase prices. Your broker will make sure you know what’s what.
If the bank doesn’t make a loss, and the property sells for a lot more, then the guarantee will not be used. The worst-case scenario is the guarantors may have to sell their house they used as security for the guarantee.
Guarantors also need to think about whether they will need to borrow any money themselves, as the banks will take this guarantee into account when assessing how much they can borrow.
Guarantors should ALWAYS seek independent legal advice before entering into an arrangement like this. There may be a cost for this but it’s worth it in the long run. LendFirst will also talk to them in depth about their obligations and what it all means – we see it as a key part of looking after our customers.
How long is the guarantee?
The guarantee is for the life of the loan, up to 30yrs. The bank can reassess the loan and release the guarantor if they are happy that they have enough security, for example, if property prices have gone up sufficiently.
LendFirst Home Loans will always help you to structure your loan to ensure that the guarantor can be removed sooner rather than later. Who can be a guarantor?
Most banks only allow parents to be guarantor but some allow siblings. More distant relations cannot usually be used.
Guarantors who are working, or can provide investment property to support the loan are usually accepted. Retired guarantors with little savings who would use their home as security for the pledge are usually not acceptable.
Can I still get the $20k First Home Owners Grant?
Yes – but disclose on your application that you are receiving financial help from the guarantors.
Key points
- Talk to LendFirst, and get your guarantor to talk to us too
- Make sure you’re comfortable with the monthly repayments for the loan
- Make sure the guarantor gets legal advice and understands exactly what they’re getting into
