Going out on your own doesn’t mean you have to do it on your own. If you are having trouble saving for a deposit your parents can ‘gift’ you the deposit or you can use a family guarantee loan.
A family guarantee loan allows the bank to use some of the equity in your parent’s property to help out as extra ‘security’ for your loan.
It works because the bank will take a mortgage over both your property and your parent’s property meaning they will hold more security.
This can help you in two ways, firstly it lets you buy faster as you do not need to save for years for the deposit. Secondly, it removes the cost of mortgage insurance which can add up to $20,000 or $30,000 depending on the size of the loan. Remember, mortgage insurance is payable when the amount you are borrowing is more than 80% of the cost to buy your new home.
Family guarantee loans have changed over time and your parents are no longer required to put their whole house up as security. These days the Banks will take a guarantee on your parent’s property for a limited amount e.g. 20% of the cost of your home and the loan is in your name, not your parents.
Let’s look at an example of you buying a $500,000 property.
Normally you would need to have saved up at least $100,000 deposit PLUS the stamp duty and legal costs. And if you can find a bank to lend 95% of the value, you would also be paying about $16,000 Mortgage Insurance.
Where a family guarantee can help.
Here’s how it operates– say you want to purchase a property for $500,000. You have enough money saved to cover the stamp duty and legal costs. Obviously you need to borrow the full $500,000.
Let’s say your parents have a property worth $750,000 which they own outright. They can ‘lend’ you equity of $100,000 which then acts as the deposit. The loan of the full $500,000 is in your name only and you don’t have to pay the mortgage insurance saving $16,000. Your parent’s guarantee is for $100,000 only.
Your parents will need to sign bank papers, provide information and a copy of title to the bank and possibly get legal advice. Make sure to speak to a good mortgage broker as not all Banks offer a family guarantee loan. Also those Banks that offer the family guarantee loan may have different policies which may not suit yours or your parent’s situation, again speaking to a good mortgage broker can assist.
What if my parent’s haven’t paid off their home loan?
This is possible provided your parent’s loan is with a Bank and the amount they owe plus your 20% is not more than 80% of the value of their property. .
How do you remove the family guarantee?
Once your loan amount is less than 80% of the value of your property the guarantee can be removed. How do you reduce the loan amount? By making sure you repay your loan on time and where possible make extra repayments. At the same time the value of your home should be increasing.
What if we default on the loan?
If something goes wrong – the bank sells your place first before activating the guarantee. And even if this did happen your parent’s liability is limited to $100,000 NOT the full house. And the loan remains in your name even though it is ‘located’ on your parent’s property.
I have siblings can my parents have more than one family guarantee?
Yes provided they have the equity in their place and provided everyone borrows at the same bank.
As always make sure to talk to a good mortgage broker who can take you through all the details.