Family guarantees can get you in your own home faster, especially if don't have the required deposit. But they're not for everyone...
Here are 7 questions I always ensure my Scarborough clients know the answer to before talking to their parents about a guarantee:
1. What is a Guarantor?
A guarantor is the related third party that provides additional security to help you buy your home. It is not the same as being a co-applicant or co-signer who is included on your loan and, like you, is responsible for the entire loan until such time as it is repaid in full.
A guarantor, on the other hand, is linked to your loan by a guarantee and, where a limited guarantee is put in place, is only responsible for the amount of the guarantee and only until such time as it is released from the loan.
2. Who Can Be a Guarantor?
For most lenders guarantors must be immediate family members, however there are exceptions to the rule. Some lenders will consider siblings, grandparents, spouses, de facto partners, adult children or friends.
3. Who is a Family Guarantee Right For?
Even though every situation is different, family guarantees will only work if:
- Your parents have enough equity in their home.
- Your parents are happy to go guarantor. Most lenders will require your parents seek legal advice first.
- Your income is sufficient to service the entire loan amount ($404,000 in our example).
- Your application (including the family guarantee) meets lender policy. Policy not only varies from lender to lender, it regularly changes. Call us at Mortgage Choice Scarborough and Osborne Park to find out which policy currently matches your needs.
4. How Much Guarantee Do I Need From my Parents?
Normally, your parents need to provide enough guarantee in the form of equity so that the total of your deposit plus their guarantee equals at least 20% of the value of the property you want to buy.
For example, if you want to buy a $400,000 property and have no deposit – many lenders will require at least $104,000 of equity in your parent’s home.
This corresponds to 20% plus borrowing cost of your purchase price, which you need to avoid paying lenders mortgage insurance (LMI).
5. What if Your Parents Still Have a Mortgage on Their Home?
Your parents can still go guarantor as long as they have enough equity in their home (value of the house minus loan balance).
However, most lenders will require all loans (existing and new) to be with the same lender. Very few lenders accept second mortgages by different lenders, but it is something that can be considered.
The best option in this case is to talk to us at Mortgage Choice Scarborough and Osborne Park to find out which lender meets your needs.
6. What if You Can’t Meet Your Repayments?
Family guarantees are not like the old style guarantees where mum and dad put their whole house on the line. These days, guarantees with most lenders are limited to the amount specified in the guarantee and the loan remains in your name – not your parents.
So if something goes wrong - the bank will sell your property first before activating the guarantee, but if this were to be the case, then the guarantor would need to pay the bank the guaranteed amount as noted in the original loan contract.
7. How Do You Remove the Family Guarantee?
You don't want the guarantee to be in place for the entire term of your loan.
Your aim should always be to release your parents of their guarantee as quickly as possible.
A family guarantee should only be seen as a short term strategy.
The best time to ask for your family guarantee to be released is when the equity in your home is 20% or more. It usually takes 2 to 5 years to be in the best position to remove it. You can still remove the guarantee if your equity is less than 20%, but you may have to pay LMI to achieve this.
Talk To An Expert
Family guarantees will get you in your home faster. But it's not for everyone.
Not every lender accepts family guarantees. And only a few will consider a second mortgage with a different lender.
For advice on your specific situation, call me - Jason Coviello at Mortgage Choice in Scarborough today on 0438 211 745 or 08 6114 7962. Or email me at Jason.firstname.lastname@example.org for more information about how a guarantor strategy could help you into your new Scarborough or Osborne Park home.
If you’d rather be social about it, feel free to head across to my Facebook Page and see if there’s already an answer to your question or pm me.
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