For first home buyers struggling to raise a decent deposit, a family guarantee loan can be a way of getting into your first home sooner.
Saving a first home deposit can take time – more so if you’re renting while saving for a place of your own. The trouble is, not only are property prices high, but in areas like Sydney and Melbourne where property values have risen by over 12% in the last year alone, the goal posts can be continually shifting outwards.
The solution isn’t to give up, but rather to look at other ways to buy into the market – and a family guarantee loan is one option.
What are family guarantee loans?
As the name suggests, with a family guarantee loan a close relative (usually mum or dad) guarantees your loan by using the equity in their place as additional security for your home.
Together with your own savings, this extra security can bump up your collateral to the equivalent of a 20% deposit. That can make a family guarantee loan a way of bypassing LMI, even if you have limited cash to provide as a down payment.
With a guarantor in place, some lenders may even let you borrow 100% of your first home’s value without the need for a cash deposit at all.
Points to consider for you and your family with a guarantee loan
It’s worth bearing in mind that having a guarantor isn’t a ‘get out of gaol free’ card. As a home buyer, lenders still want to see that you can comfortably manage the loan repayments.
For the guarantor, agreeing to stump up their own home as security is a significant responsibility – and it’s not a decision for family members to take lightly.
A guarantor isn’t responsible for the regular monthly repayments on your loan. But – and it’s a big but – if you cannot keep up the repayments on your home loan, the lender can turn to the guarantor to pay back the entire loan plus any outstanding fees, charges or interest.
In the meantime, offering to guarantee your loan can impact the guarantor’s ability to borrow for their own needs.
It’s a lot for family members to weigh up, and it’s worth speaking with your Aussie Broker to understand the responsibilities that go hand in hand with being a guarantor.
Flexibility of family guarantee loans
Fortunately, family guarantee loans can come with a degree of flexibility. Your guarantor may be able to choose how much of the loan they guarantee – for instance, if you have a deposit of 5%, the guarantor may be able to provide a guarantee for just 15% of your loan and still let you avoid the cost of LMI.
Similarly, the role of guarantor doesn’t have to last for the full term of your loan. One possibility is to split your home loan between the amount being guaranteed, and the remaining balance. When your home has risen in value by enough to cover the amount guaranteed, the guarantor can be released from their responsibility.
Upfront costs involved in buying a home
While a guarantor may get you over the line with your loan, it pays not to overlook the upfront costs associated with buying a home.
You’ll still need to budget for a range of purchase costs such as stamp duty, legal fees, pre-purchase inspections and any expenses of moving into your new home. On the plus side, if you’re a first home buyer, you may be entitled to a range of concessions on stamp duty, and/or be eligible for the First Home Owner Grant, which can help to make these purchase costs more manageable.
Many first home buyer entitlements have changed since 1 July 2017, so even if you weren’t eligible previously, it’s worth a second look to see what’s new for first home buyers.
A family guarantee loan can offer a real option to take that first step on the property ladder at today’s prices, rather than waiting to save a bigger deposit, by which time prices may have risen higher.
Speak to your Aussie Broker to understand if a guarantee could help you into your first home sooner.
You may also be interested in the ins and outs of buying a home with little or no deposit, Is it time to think outside the box to get on the property ladder? and Keep it in the family.