Get a foot in the door with a guarantor home loan
With house prices in Australian capital cities out of reach for many first home buyers, saving the deposit you need for a home loan could take several years. Of course, by that time house prices may well have increased even further beyond your reach, so how can you find a way to get into the property market?
An option employed by some Australians is a family pledge home loan. Also known as family guarantee home loans and guarantor home loans, these types of mortgages allow you to make up for the fact that you don’t have a sufficient deposit saved by using the equity in a family member’s house as security on your loan.
There are plenty of advantages and a few potential drawbacks to family guarantee home loans, so read on to find out whether they’re right for you.
What is a family guarantee?
A family guarantee is a type of guarantee that can be made to secure a property. This is done by securing the deposit shortfall to a property owned by the guarantor, such as your parents or a close family member. It is also known as a guarantor home loan.
Home loans with a family guarantee feature
How does a family guarantee work?
A family pledge allows you to use the equity in your parents’ property or another family member’s property as security on a home loan. Guarantors are limited to immediate family members, including parents, grandparents and siblings.
While it was once standard practice to guarantee the entire loan and put your home on the line, today the security on the new home loan can be split and you can limit your guarantee. For example, the equity in your parents’ property may be used as security for 20% of the loan, while the property you are purchasing will be used as security for the other 80% of the loan. So if you’re helping your kids purchase a property for $500,000, your 20% guarantee is only $100,000.
- How much do they have to guarantee? A common strategy is to guarantee enough equity so that the borrower avoids paying Lenders Mortgage Insurance (LMI). A parent will need to guarantee 20% of the purchase price of the new property if the borrower has no deposit.
- What can be bought with a family guarantee? The family guarantee can be used to buy a home or invest in residential property so buyers will be able to use normal home loans and investment home loans.
What are the benefits?
The family guarantee will allow you to:
Access finance. Most loans will have a minimum deposit that will have to be paid upfront in order to be accepted. This will usually be around 20%, or less if you pay LMI. With a family guarantee you may be able to borrow more money and provide less of a deposit which will allow you to buy a home sooner.
Avoid LMI. Borrowing more than 80% LVR usually requires you to take out lender’s mortgage insurance, but a family guarantee means this extra expense can be avoided.
Increase borrowing power. A family guarantee can boost your borrowing power. The family guarantee will often be used to cover a deposit that can't be paid so you will be able to borrow close to 100% of the loan in some cases if properly secured. Often, guarantor borrowers can borrow 100% of a property value plus costs.
- Eligible for FHOG. Taking out a family pledge home loan means you are still eligible for financial assistance through the First Home Owners Grant. In addition, it also means you will be eligible to access most mortgage products from a lender.
- Limit your guarantee. While the traditional approach is to guarantee the full loan, in many cases you have the option of guaranteeing just a portion of the loan, for example 20%. Once the standard LVR requirements of the loan product have been met due to loan repayments being made or a rise in the valuation of the home, the guarantee on the loan is released.
What are the drawbacks?
- Putting the family home at risk. If you’re the guarantor you could be putting your family home at risk, so consider all your options before choosing this approach.
- Not receiving expert advice. If you’re considering applying for a family guarantee home loan, it’s important that you seek out independent financial and legal advice first. You need to understand exactly what the guarantor will be liable for in the event that you default on the loan.
- Not all banks offer family guarantees. Family pledge home loans aren’t offered by all lenders, so the best thing to do is approach a mortgage broker for advice tailored to your needs.
The Big Four family guarantee loans
There are several family guarantees you can choose from. Below we will look at the Big Four banks and their family guarantee loans.
ANZ Family Guarantee
The ANZ Bank Family Guarantee allows some family members to use the equity in their home as a security for a part of your total home loan. Family members include parents, parents-in-law, stepparents and grandparents and siblings will be considered. With this you’ll be able to buy a property sooner and avoid paying the premium for lenders mortgage insurance, according to the ANZ website.
NAB Family Guarantee
The NAB Family Guarantee permits a family member like a parent to use the equity in their existing home as a security on the new home loan of the borrower. There are some features you might want to be aware of. First of all this guarantee may be used to secure a range of NAB branded home loans, so you can still choose the loan best suited for you. Second, this guarantee has to be secured by either a first registered residential mortgage or NAB Term Deposit.
Commonwealth Family Equity
The Commonwealth Bank Family Equity loan provides five financing options. These options range from family member acting as a guarantor and therefore giving some kind of security towards a loan, to giving assistance with mortgage repayments. The Family Equity is suitable for borrowers who are unable to service the loan.
Westpac Rocket Investment Loan
Westpac allow you to guarantee a loan with the help your family. They also have family guarantee options within some of the investment loans. The Westpac Rocket Investment Loan, for instance, offers a family guarantee feature.This feature allows Westpac customers to borrow 95% of the purchase price and associated costs where their parents guarantee the loan through the provision of another security property.
Family pledge loans
If your credit is not perfect or you simply don't have a lot of credit history, you may be able to opt for a family pledge loan. These types of loans require that someone else 'guarantee' the loan. This can be a parent or parents, a brother or sister or anyone in your family who would be comfortable offering you some help.
This support can come by way of using their own income to help to supplement the borrower's or they can use their own property as a security for the loan.
Reasons some borrowers choose a family pledge loan
Starting a new job – If you've just graduated and recently acquired a job in your field you may not have the salary and subsequently the buying power necessary to purchase a home. This is where a family pledge loan might be able to help. These loans will help you to buy a house while waiting for your income to increase. When your income is higher then you can pay off your loan a little faster.
Reducing or eliminating mortgage insurance – If you are able to purchase a home, but the chosen loan would require mortgage insurance then a family pledge loan could help. If a family member can assist you then you will have more purchasing power and you will not need to pay LMI. This insurance only benefits the lender so if you can avoid it it will be much better for you and you'll save money.