A ‘Family Guarantor home loan’ may help you buy sooner and save thousands.
A Family Guarantor loan can seem like the miracle product for many young people as it can get you into a home sooner and cheaper. 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 reading this and if you like it, please share or add a comment.
What is a family guarantor home loan?
Sometimes called a family pledge, family guarantee or family support loan, the family guarantor home loan is a special bank product where a family member provides an additional security in addition to the one you are buying, to reduce the banks risk. Through doing this, you save money and can buy your home sooner without having to save such a big deposit.
Who can be a guarantor?
Generally this means direct family members of father, mother, brother or sister who own a suitable property with a modest debt. Different banks have different policies though and although there are only 6 or 7 lenders that have a guarantor home loan product, some do allow for step-parents, grand parents and more distant relatives. A mortgage specialist can help determine which lenders are best.
How does a home loan guarantor save me money?
Banks require a 20% deposit plus stamp duty and legal/ conveyancing to end up with a 80% loan (loan to valuation ratio). To borrow above 80%, you generally need to pay Lenders Mortgage Insurance which can be expensive. As an example, a $500,000 purchase with 95% loan will require a $16,000 – $24,000 mortgage insurance premium, depending on the lender and their insurer. Its more to borrow, more to repay and additional income you need to prove for servicing.
A guarantor offers a second security instead of the additional cash deposit so that the loan portion above 80%, is secured by the guarantors property.
Scenario with NO GUARANTOR
$ 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)
$ 50,300 Cash savings available
$ 470,000 Loan funds required to settle purchase
94% Loan to valuation ratio so lenders mortgage insurance is required
$ 20,000 Lenders insurance required – average (range is $16,000 to $24,000)
$ 490,000 Total loans required with the lender
Scenario WITH FAMILY GUARANTOR: $ 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 guarantor home loan portion (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 guarantor home loan portion, (in the name of the applicants and the parents) $ 470,000 Total loans required with lender You can see from the difference, that approx $20,000 is saved immediately, monthly repayments are lower and over 30 years you could pay another $20,000 or so interest on top of this, to pay the extra loan back. A guarantor will save you between $20,000 and $40,000. If you find this confusing, we can put you in touch with a qualified mortgage specialist to calculate the numbers for you and suggest the best lenders.
If I have no deposit but I have a Guarantor loan, what can I borrow?
Can I borrow with no deposit?
Most lenders require the minimum 5% deposit plus stamp duty but when a family member guarantees your loan, you can use less deposit, in fact no deposit is acceptable in a specific situations. In the example above you needed to save $50,300 minimum to get a loan yourself and this can take years to save. With a family guarantee, in some cases, you can borrow 100% of the purchase price plus the stamp duty and legal costs.
With property prices rising, it means you buy earlier and benefit from the capital gain, rather than having to wait and save, as property prices rise and you need an ever increasing deposit amount.
Why would a bank do this?
In short, the home loan guarantor product is good for business. There are many genuine people with strong incomes, perhaps paying very high rents, but have low deposits. There are also plenty of parents wanting to help their kids get into their first home and they know that their siblings will pay the loan and that this first step will set them up for good.
The bank requires enough security to cover their losses if you default on the loan, as well as a strong ability for you to afford to make loan repayments. The guarantee helps protect the financial loss on the property if it was sold, but they will also require strong repayment ability to be evidenced, showing that your likelihood of getting into trouble is reduced. The banks all have detailed calculators that a professional mortgage consultant has access to and can see if you qualify. More important than qualifying though, is your ability to actually make the repayments. You need to review your finances before obtaining a loan, so that the repayments won’t put you in hardship.
“I didn’t want to ask my parents for money, I wanted to go it alone, but it wasn’t going to happen for another 2 years at least and then with around $15,000 in Mortgage Insurance. Finance Professionals explained the options and summarised the points for my parents, and it just made so much sense. My parents loved being able to help me without having to put physical cash in and I bought my property earlier as well as saved years off my mortgage payments as it was smaller. Thanks Finance Professionals”. Ben – Balgowlah.
Is a family guarantor home loan suitable for me?
There are many 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 guarantee 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.
Is my family guarantor at risk of losing their property?
The short answer is YES. If you cannot afford the repayments, you get behind, and the bank sells the property in a fire sale, there may not be enough money to pay out the loans and the guarantor is liable for the difference, up to the maximum of the guarantee your family signed.
Now in reality this is rare, because as property prices rise the equity you earn grows. The loan is also being paid down over time, so the highest risk is right at the beginning of the loan when the net equity is the smallest, but as time passes and there is more equity in the property, the risk of a loss at a fire sale is reduced.
You should never enter a loan if you think the repayments will put you into potential hardship and if this does happen through circumstances outside your control, talk to them straight away to see how they might be able to help you. With proper communication, even if things get tough, you should have enough leeway to run a proper sales campaign to sell the property for its best value, rather than a fire sale and further reduce the potential loss.
Are my family tied into their loan portion for as long as I own the house?
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).
How is the guarantor security property released?
As the purchased property value increases over time and the family guarantor home loan portion is also partially paid down, as soon as total loans become 80% of the increased home 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 home 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 guarantee home 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 guarantee loan 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 guarantee lenders also apply postcode restrictions so just going to your local/ regular lender might mean the loan is not approved and a mark is made on your credit file, whereas going to the right lender may mean you get the approval.
What if my family’s 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 offered as guarantee, however most 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 family guarantor’s current lender does not allow second mortgages or the new lender doesn’t accept second mortgages from your lender, then a refinance of the guarantors existing loan to the same lender as the new loan, may be required. Professional advisers will generally suggest this as a last resort, however sometimes a better loan rate for both parties can also 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 family to guarantor the full home loan (as in the above example it would be $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.
“We initially went to my regular bank and had been with them for 7 years and they said NO to my application and at the last minute! My real estate agent suggested Finance Professionals often find solutions. We met and they suggested Family Pledge and offered to meet with us and my parents to go over it fairly and we agreed. A week later we had formal approval. A year down the track and we love our home, we’ve made improvements and gained $80,000 in extra property value already, plus we got married. It was a great product for us”. Peta and John – Newport Beach.
Is this loan suitable for us?
There are qualifying criteria and varying loan policies depending on the lender. It sounds complicated and there are many rules, 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 obtain the loan, we need to make sure that this family guarantee is not unsuitable for you too. It must be a win-win for all parties to the loans.
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.
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