Building a deposit for your first mortgage can be a daunting task and while there may be government first home buyer packages available, they often don’t extend to the property value many first home buyers are targeting in Sydney and Melbourne.
This is where a family guarantee can help and is exceptionally useful where your servicing borrowing capacity meets the value of the property being purchased.
What you need to know about family guarantees
1) A family member provides the guarantee
A family guarantee allows a direct family member (normally a parent or sibling) to provide an additional security that the lender can use to ensure the loan to value ratio does not exceed 80%. For example, if you want to purchase a property valued at $1,000,000 but only have $100,000 in cash deposit saved, using a family guarantee will allow you to borrow the additional $900,000 required and funds for stamp duty and conveyancing without paying mortgage insurance.
2) Servicing must be evident for the full loan amount
Only the applicants’ income is considered. There are rules around whether the guarantor’s income is used, depending on whether the guarantor property is owner occupied or for investment, and there are additional rules regarding existing mortgages on the guarantor property.
3) Better interest rates
Interest rates are often a lot better under a family guarantee arrangement as the LVR is 80% and therefore better discounting can be achieved.
4) The guarantee only remains in place until it is required
The guarantee remains in place as long as it is required to maintain a LVR at or below 80%. Once the value of the property being purchased has increased sufficiently such that the outstanding loan balance is less than 80% then the security property can be discharged. This often takes anywhere between 3 to 5 years depending on property price growth and your ability to pay down the debt.
5) When mortgage insurance is needed
If the guarantor property is sold while the guarantee is still in place and no other guarantee is available then mortgage insurance will apply if the LVR is still over 80%.
Family guarantee loans are a great way to get into your home (it does not need to be your first home) without a 20% deposit and avoid mortgage insurance. It also means you don’t need a cash gift from the Bank of Mum and Dad. But it does influence the ability of the guarantor to transact the security property.
Want to see how a family guarantee could work for you? Book a confidential and obligation-free chat with me here.
