Buying your first home is a huge milestone, and with rising property prices, it can feel out of reach. Luckily, there’s a way for first home buyers to get some extra support from family: the Family Guarantee. This option allows parents (or sometimes other family members) to help you secure a loan without needing to cover a large deposit upfront.
Let’s break down what a Family Guarantee is, how it works, and the process for buying your first home with a family guarantee in easy-to-understand terms.
What Is a Family Guarantee?
In simple terms, a Family Guarantee is when a family member (often a parent) uses some of the equity in their own home to help you secure a mortgage. By using a portion of their home’s value as security, they “guarantee” part of your loan, helping you qualify without needing a big deposit or paying Lender’s Mortgage Insurance (LMI), which can be costly.
For example:
If your lender requires a 20% deposit and you only have 10%, a family member can guarantee the remaining 10% using their own home equity.
This helps you get a loan sooner, even with a smaller cash deposit.
How Does It Work?
Here’s a simple step-by-step look at how the family guarantee process works:
1. Meet with Your Lender
First, you’ll need to meet with your chosen lender to discuss loan options. Not all lenders offer family guarantees, so you’ll need to find one that does.
2. Evaluate the Family Member’s Equity
The lender will assess your family member’s property to determine how much equity they have. For example, if your parent owns a home worth $600,000 and they owe $200,000, they have $400,000 in equity. A portion of this equity can then be used to guarantee your loan.
3. Family Member Becomes a Guarantor
Your family member doesn’t give you money; instead, they agree to be a guarantor for the portion of your loan that covers the deposit (usually up to 20%). They’ll sign legal documents, confirming their home equity can be used to secure your mortgage.
4. Sign Your Loan Agreement
Once the lender has approved your loan and the family guarantee is in place, you’ll sign your loan agreement. Your guarantor will also sign a separate agreement to confirm their role.
5. Make Repayments and Build Equity
You’ll start making regular mortgage repayments, and as you build up enough equity in your home, you can release your family member from the guarantee. This is usually done by refinancing the loan or reaching the point where your loan-to-value ratio (LVR) drops below 80%.
What Are the Requirements?
1. Strong Relationship with the Guarantor
Family guarantees are generally restricted to close family members, like parents or, in some cases, siblings. Banks require a strong, trusted relationship for this type of guarantee.
2. Guarantor’s Financial Health
The family member who offers the guarantee must have enough equity in their property and be financially stable. Lenders may conduct a financial assessment on the guarantor to ensure they could cover the debt if needed.
3. Ability to Repay
Although the family guarantee helps secure the loan, you must still be able to afford the repayments on your own. Lenders will assess your income, employment, and other financial factors to confirm you can repay the loan.
Benefits of a Family Guarantee for First Home Buyers
1. Reduced Deposit Requirement
Without needing to save up a 20% deposit, you can buy a home sooner. This can be especially helpful if property prices are rising.
2. Avoid Lender’s Mortgage Insurance (LMI)
With a family guarantee, you can avoid the additional cost of LMI, which is typically charged if you have a deposit below 20%. This can save you thousands of dollars.
3. Enter the Property Market Faster
With a family guarantee, you don’t need to wait years to save up a large deposit, allowing you to enter the market sooner.
Potential Risks and Things to Consider
While a family guarantee can be very helpful, there are a few important things to consider:
Risk for the Guarantor: If you’re unable to make your mortgage repayments, your family member (the guarantor) could be responsible for covering the guaranteed portion of the loan. Make sure you’re financially ready for the commitment.
Releasing the Guarantee: Once you’ve built enough equity (generally when your LVR is below 80%), it’s recommended to release your family member from the guarantee. This is usually done by refinancing your loan with the lender.
Professional Advice: Family guarantees come with legal and financial considerations. It’s essential that all parties seek independent professional advice from a financial advisor or conveyancer to fully understand the responsibilities involved.
Ready to Buy Your First Home?
If you’re considering buying your first property with a family guarantee, contact SL Conveyancing. We’re here to help you understand the process, protect your interests, and make your first home purchase a positive experience.
Have questions? Reach out to us today for a consultation and let’s start planning your first home purchase, backed by family support and our expert guidance!
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