September 19, 2017
Help your children achieve their home ownership goals faster
In recent years, family guarantees have become more commonplace in the mortgage market.
Data from Mortgage Choice shows the percentage of first home buyers getting a parent or other family member to go guarantor on their loan has tripled over the last two years.
So what can this rise in guarantor popularity be attributed to?
In a nutshell, property prices are climbing at an impressive rate across most markets in Australia.
Data from the Australian Bureau of Statistics shows the average home loan has grown almost four times faster than the average Australian full-time wage.
Because of this, first time buyers are finding it harder than ever to save a home deposit and thus get their foot on the property ladder.
Which is where family guarantee loans come in. If a parent goes guarantor on a child’s loan, this can effectively help them get on the property ladder faster by stopping them from having to save a significant (10 -20%) deposit.
Of course, before we can talk about the benefits of family guarantee loans, it is important to start back at the basics.
What is a guarantor?
In its simplest form, a guarantor is a third party to a home loan, helping someone (generally younger buyers) to get a loan by offering additional security support.
As a general rule of thumb, guarantors are limited to parents, or in some cases immediate family members.
A guarantor allows the equity in their own property to be used as additional security for their child’s loan. The primary security for the loan will be the property that the kids are buying, but the lender will also take a mortgage over the guarantor’s property.
It is important to note that the guarantor doesn’t have to pay their child’s mortgage, nor do they have to make any payments on the ‘mortgage’ that the lender takes over their property, so long as the kids continue to make repayments on time.
If as the “child” in this arrangement you default on your loan and can no longer meet your mortgage repayments, the guarantor is legally responsible for paying back the entire loan. They will also be required to pay any interest, fees and charges associated with your mortgage. It is best to structure the loan so that the guarantor is a party only to the portion of the loan that is required to cover your deposit. You will need to talk to your mortgage broker about how to do this.
For this reason, it is imperative that you sit down with your guarantor and let them know exactly what they are getting themselves in for before they sign on the dotted line. Your mortgage broker will need to meet and talk to the guarantor to make sure they understand what is happening.
So now that you know what a guarantor is, you may be thinking: why do I need one? What is the benefit of having my spouse or a family member go guarantor?
The benefits of a guarantor
There are couple of great benefits associated with family guarantee loans. Firstly, your guarantor can help you secure additional funds to buy that dream home.
Often buyers, especially first time buyers, will have the income they need to service a mortgage of a certain size, but they do not have the deposit they need (usually 10% plus costs). A guarantor allows those first time buyers to avoid having to save a large deposit.
The second main benefit of having a guarantor is the ability to avoid paying costly Lenders Mortgage Insurance (LMI).
Generally speaking, LMI is required for home loans where you have less than 20% deposit i.e. the loan is greater than 80% of the value of the property. LMI is a type of insurance which lenders take out to cover the additional risk of high loan to value lending. Although this insurance covers the lender against the risk of you defaulting on your loan, you pay the premium.
By having a family member guarantee your loan, you effectively avoid paying this premium (it is as if you have a 20% deposit).
It is important to note that even though you may not have enough deposit, the lender will still assess your ability to make repayments. For example, they will look at your income and whether you have been able to make any savings or pay rent similar to loan repayments. Your mortgage broker will be able to discuss what is required.
To find out more about how guarantee loans work and whether this type of loan is right for you, contact me today for an obligation free appointment.