A family guarantee enables a parent or immediate family member to act as a guarantor for an adult child by using the equity in their own home or a term deposit as security for a loan.
Family guarantee home loans give the guarantee a head start by letting them purchase a property without a deposit.
If you agree to be a guarantor you are legally bound to repay the loan if for some reason the guarantee cannot. It is a large step to take and you should seriously consider the consequences of being a guarantor.
How does it work?
The family guarantee can work in a variety of ways, depending on what you would like to use the guarantee for. The family guarantee will work by:
• Family members equity – when you get a family guarantee you will be using the equity that your family member has gained in their property as security on your loan.
• How much do they have to guarantee – the family member will be able to choose how much they will guarantee. While there will be minimum limits the more the family member can guarantee the more benefit you will be able to get from the agreement.
What does the Family Guarantee allow the borrower to do?
The family guarantee will allow the borrower to do many things that they would have previously been unable to do. The main things the family guarantee will allow them to do will be:
• Buy a home sooner. Most loans will have a minimum deposit that will have to be paid upfront in order to be accepted. This will usually be around 20% or less if the borrower(s) are willing to pay lenders mortgage insurance. With a family guarantee they will be able to borrow more money and provide less of a deposit which will allow them to buy a home sooner.
• Reduce the need for lenders mortgage insurance. If the borrower was only able to give less than a 20% deposit then they would generally still have to pay lenders mortgage insurance. However, with a family guarantee covering the rest of the deposit money they may be able to avoid paying lenders mortgage insurance, which will save them money.
• Maximise the amount the borrower can borrow. By getting the family guarantee they may be able to borrow more money than they would have originally been able to. The family guarantee will often be used to cover a deposit that can’t be paid so they will be able to borrow close to 100% of the loan in some cases if properly secured.
Many financial institutions have different types of Family Guarantee loans so it’s good to compare them.
^ Paul – Lending Services Manager