Family guarantee – a low deposit option

August 19, 2015
Shae Aiello

The biggest hurdle that many prospective home buyers are facing is how to get together a deposit that is sufficient enough for them to qualify for a home loan.

Most people find it extremely difficult to save a big enough deposit, while also covering their day to day living expenses such as rent, bills, petrol etc.

This is where the guarantor option becomes a viable choice, not only for first home buyers, but also those considering upgrading their home.

Related: how much deposit do I need to buy a home?

Guarantor explained

Being a guarantor generally means using the equity in your own residence or investment property as security for your child’s home loan.

If they don’t have at least a 20% deposit, going guarantor can help them to secure finance for a property without having to pay Lender’s Mortgage Insurance (LMI).

Paying LMI can easily add more than $10,000 to the home loan, so it’s great if there are options to avoid paying it.

Guarantee options

There are two main types of guarantees:

  1. A supported guarantee (also known as a security guarantee), where the guarantors home or investment property is provided as security for the borrowers home loan. This is the most common guarantee, or

  2. An unsupported guarantee, where if the borrower can’t meet their repayments, the guarantor services the loan. Unsupported guarantees are less common than supported guarantees as it is not that easy to get them approved by lenders.

A popular strategy is to limit the liability that a guarantor takes on. For example, a guarantee can be limited to 20% of the purchase price, just so their children can escape paying the LMI premium. Most lenders will also offer guarantors and borrowers the option to split the loan into two different loans, giving a clear separation between the parents guaranteed portion and the child's portion.

Once the guarantor has paid down their portion of the loan quickly, they can then arrange for the bank to remove them as guarantors and release the guaranteed security sooner rather than later.

Risks

There can be risks associated with going guarantor. For example, if the borrower fails to make their repayments, the lender is legally entitled to sell the property to recoup the money they have lent. If there is still a shortfall, the lender can then go to the guarantor for the remainder of the funds owed. This may mean that they will sell the guarantors home as well.

It’s always sensible to obtain independent legal advice before guaranteeing any home loan. Many lenders make this is a mandatory part of the process. As an added precaution, we strongly suggest that all borrowers speak to our Mortgage Choice Financial Planner, Steven Iremonger, about taking out life and income protection insurance to protect their ability to continue making loan repayments if they are unable to work.

Gifting funds

For parents not wanting to become a guarantor, but who would still like to find another way to help their child get into the property market, gifting cash can be another option. This where they can give a non-repayable amount to assist with the deposit or fees, rather than tie up a property in a security guarantee.

In summary, there are a number of different ways to help your child get into the property market. To discuss which one would best work in your situation, give home loan expert Steve Sims a call on 0433 124 081 or steve.sims@mortgagechoice.com.au.

 

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