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?
One option worth considering 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.
How does a family guarantee work?
A family pledge allows family members to support each other without actually providing any cash. They allow 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.
From a bank’s point of view, a family pledge makes them much more likely to approve a home loan. With more than one security on a loan, your bank will have an extra level of protection if you are unable to make repayments and default on your loan.
At the same time, your children can get into their own home sooner, avoid the cost of mortgage insurance, and even have the power to borrow 100% of the purchase price of their property.
- 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 do many things that you would have previously been unable to do. The main things the family guarantee will allow you to do will be:
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 slightly less if you want to pay LMI. With a family guarantee you will 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 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.
Home loans with a family guarantee feature
Rates last updated October 27th, 2016.
- ANZ Fixed Rate Home Loan - 2 Year Fixed (Owner Occupier)
Comparative rate decreases by 0.10%
August 12th, 2016
- NAB Base Variable Rate Home Loan - Owner Occupier (P&I)
Comparative rate decreases by 0.10% | Interest rate decreases by 0.10%
August 19th, 2016
- Heritage Bank Discount Variable Home Loan - Special Rate Offer (Owner Occupier)
Advertised rate dropped to 3.79%
August 24th, 2016
How much deposit do I need?
The amount of deposit you will need to save for a loan varies depending on the lender, the loan product you choose and your individual borrowing circumstances. While in some cases you might be allowed to borrow up to 95% loan-to-value (LVR) ratio, as a general rule it’s a good idea to have a 20% deposit saved. This is because if you need to borrow more than 80% LVR, you will most likely have to take out lender’s mortgage insurance (LMI) on your loan, which is an additional expense of several thousand dollars.
It’s also worth pointing out that there are many other expenses to consider when you purchase a property, including stamp duty, conveyancing fees, home loan application fees and more. Opting for a guarantor home loan can help you cover the costs of property ownership.
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.
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. You could also maximise the money you ought to borrow.
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, 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.
The Commonwealth Bank Family Equity provides five financing options. This options go 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 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.
What to expect from these loans
There are a couple of different family pledge loans out there. These loans are either equity support or income support and they both work differently from each other.
This type of loan is probably the most popular. This means that the person who is providing the support (the family member) will put up his or her equity as support for your loan. This will be the security provided that is necessary for the loan to be granted. First-time homebuyers find it quite difficult to come up with the 20% deposit that is necessary to get into a home. The person who is the guarantor (the family member) is then responsible for the percentage that is above the 80% that you borrowed. This will cover the gap in the deposit.
This loan guarantees the entire loan instead of the amount that is above 20% like the previous loan, as the borrowers can't afford repayments on their own with their current income. These loans are uncommon, but may be used for recent graduates who have gotten their first job without a huge salary. This loan will provide support for their income as they climb the ladder to better paying positions. Once the borrower has a higher income, the support guarantee could be removed if the contract allows for this.
These types of loans are a great way for families to help each other when you are just getting started out there. As with any loan, you should make yourself fully aware of all of the requirements before entering into the contract so you know what you're getting into. There are some risks to these loans so educating yourself will be necessary to minimise those risks.
Family pledge loans
Buying a home can be a difficult process. There's the stress of finding the home but there is also the stress of getting approved for the financing. Oftentimes, people are using financing or credit for the very first time for a large purchase such as a home. This can be seen as risky to lenders. There is something you can do, that will make it possible for you to get the loan for your dream home.
Help when you need it
There is a type of loan that you might need if you are someone whose credit is not perfect or you simply don't have a lot of credit history at this point in your life. You can opt for a family pledge loan and that will make it possible for you to obtain the funding you need for your home. These types of loans require that someone else other than yourself 'guarantee' the loan. This can be a parent or parents, a brother or sister or really anyone in your family that would be comfortable offering you some help in this way.
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. This is a wonderful way for family members to help each other out in order to achieve dreams.
Reasons for borrowers to choose a family pledge loan
There is no one single reason that people choose family pledge Loans but here are a few:
You just started a new job – If you've just graduated and recently acquired a job in your field, it is a wonderful thing but you may not have the salary and subsequently the buying power necessary to purchase a home. This is where a family pledge loan really helps out. These loans will help you to buy the house that you would like now 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 this is a time that a family pledge loan will help you out. 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.
You want to get into the real estate market – Let's say you want to get into real estate but your credit is a little week still, then a family pledge loan will allow you to get into the game without having to wait until your credit strengthens. You will be able to get that first home you've been dying for but weren't sure how you could do it.