Help your family purchase sooner and save thousands with a family guarantee loan.
Family Guarantee loans are one of the best ways to help your kids get into a property sooner, without using your own cash and being able to limit your risk. We answer the most asked questions below and offer a free no-obligation 20 min conversation to talk through your scenario if you think this loan type might be suitable for you . Enjoy and if you like it, please share or add a comment.
How and what is a family guarantee loan exactly?
- Banks need security on their loans in the form of a deposit.
- Also, if the banks are lending you over 80% of the initial purchase price of the property, (excluding stamp duty and legal costs) they will require you to take out costly lender’s mortgage insurance.
- The family pledge loan, otherwise known as a family guarantee loan, allows a parent or in some cases another family member, to offer a property they own (with or without a mortgage), as a second security for the bank. This means that in the unlikely event that the loan defaults, the bank sell the purchased property and if there is a shortfall in paying back the loan, the bank can call on the family member’s asset (the family guaranteed amount) to retrieve the oustanding money.
How does this allow my kids to purchase a property sooner or to save money?
- If a family guarantees your loan, you don’t need such a large deposit and can therefore purchase much sooner. With property prices rising, it means they get the capital gain rather than just be chasing increasing property prices, needing ever increasing deposit amounts.
- Lender’s mortgage insurance can be very costly (e.g. $500,000 purchase with 95% loan = $16,000 – $25,000 insurance). This money has to saved or with selected lenders it can be added to the loan which then adds extra burden on loan repayments and has to be paid off. This insurance can be avoided by taking out a loan with a Family Guarantee.
Is this loan suitable for me?
There are personal issues to consider, plus lenders qualifying criteria, varying loan policies and security restrictions and these all vary depending on the lender. A qualified specialist that does pledge loans regularly can help you through this maze and save you money. If you don’t know someone, we can put you in touch with a specialist.
How does it work exactly?
If you have a deposit which is less than 20% of the purchase price of the property you options are
- to buy a property now but pay expensive lender’s mortgage insurance
- to wait until you have saved up the 20% deposit AND stamp duty and legal fees, in order to avoid paying the insurance.
- to have your family guarantee your family pledge loan so that you can buy now and without paying the insurance.
Family guarantee loan example:$ 500,000 Purchase in NSW $ 18,300 Stamp duty and transfer costs $ 2,000 Estimate of legal/conveyancer costs $ 520,300 Funds required to settle (plus rates adjustments etc) $ 400,000 Maximum loan to avoid mortgage insurance (in the name of applicants only) $ 50,300 Cash savings $ 450,300 Money available for settlement before family guarantee $ 70,000 Family guarantee loan required as guarantee (in the name of the parents and applicants) $ 520,300 Funds available for settlement The loans become: $ 400,000 In the name of the applicants $ 70,000 Family guarantee loan portion, in the name of the applicants and the parents
Am I tied into the Guarantor loan portion for 30 years?
The initial loan term can be set at 20, 25, 30 years as you require, although most choose 30 years so that the monthly repayment commitment is the lowest. The loan can be paid out from cash windfalls, inheritance, savings etc. at any time (additional penalties may apply for Fixed Interest rate loans), or you can be released when the 80% loan to valuation ratio is met (example further below).
When can my guarantor security property be released?
The purpose of the family guarantee is so that the total borrowings of all loans against the purchased property is no more than 80% of the value. As the new property value increases and the pledge loan portion is partially paid down, when the total loans become 80% of the value, you can apply to the bank to have the guarantor security released.
Security release example:
Scenario at purchase date
$ 500,000 Purchase price in NSW
$ 400,000 In the name of the applicants
$ 70,000 Family guarantee loan portion, in the name of the applicants and the parents
$ 470,000 Total loans representing 94% of the property value
Scenario a few years down the track
$ 540,000 Property value due to capital growth and improvements
$ 382,000 Applicants loan paid down slightly
$ 50,000 Family guarnatee loan paid down slightly and faster than the above
$ 432,000 Total loans representing 80% of the property value so release of the guarantor property can be considered
What type security can be used for the family guarantor portion?
Preference is given to residential investment properties, then to family homes (conditions apply) and in rare cases, sometimes specialised or commercial properties. Properties in Trusts or SMSF are not acceptable. Cash deposit accounts can also be considered for some lenders. Some family pledge lenders also apply postcode restrictions so just going to a local/ regular lender might mean the loan is not approved, whereas another may be happy to accept the application.
What if my property already has a loan on it?
The residential security property can have an existing loan on it. The maximum loan size of the existing loan(s) plus the new guarantee portion must be a maximum 80% of the guarantor security property.
A few banks accept second mortgages on the parents’ property being pledged, however others don’t. Some banks wan’t to know income details about the guarantor while others are just satisfied with the security being offered.
If your current lender does not allow second mortgages or the new lender doesn’t accept second mortgages from you lender, then a refinance of the guarantors existing loan to the same lender as the new loan may be required. Professional advisers will generally do this as a last resort, however sometimes a better loan rate for both parties can be negotiated due to the larger total lending being brought to the new bank, so it can be beneficial in a few cases.
Not all banks and loans are created equal
Some banks want the parents to guarantee the full loan (as in the above example $470,000), whilst others will limit the guarantee to just the $70,000 portion. Some banks will release the guarantor property once the 80% is reached, but others may want to do a full financial review of the applicants again, to consider releasing the pledge loan. If this is important to you, choose the right bank in the first place so its easy to remove the guarantee later. We can point you to the people to help assess the most suitable for you.
Is this loan suitable for us?
There are qualifying criteria and varying loan policies depending on the lender, but we can help you through this maze to select the most appropriate lender. Your particular circumstances need to be considered as well. Whilst you want to help your family, we need to make sure that this pledge loan is not unsuitable for you too. It must be a win-win for all parties to the loans.
If you think you are in a position to be able to save your kids thousands in insurance or just get them into the market sooner, its important you get professional help from people that do this regularly. You can contact us for a free no obligation 15 minute discussion on your needs, and we can then direct you to a local specialist who can go into detail and help all the way from analysis, providing the options, helping complete the paperwork and then following through until settlement.
Complete the form below to receive a copy of our special report on Guarantor loans or book a free eligibility call.