First home buyers often struggle getting into the market due to having low savings caused by high cost of living and higher property prices.

There are a range of ways in which parents or other family members can help borrowers, one of which is with a Family Guarantor loan structure.

What Is a Family Guarantor Loan and How Does It Work?

A Family Guarantor loan structure allows parents to assist without the need for a cash contribution. Rather, they allow a portion of the equity in their property to secure the new lending.

This benefits borrowers who have less than a 20% deposit for the purchase by avoiding the need for Lender’s Mortgage Insurance (LMI) fees. Family Guarantor loans often have lower rates than loans above 80% of the property's value.

How a Family Guarantor Loan Helps Avoid Lender’s Mortgage Insurance (LMI)

When banks lend money for a property purchase, the loan is secured by the property being purchased. When the amount borrowed is more than 80% of the property’s value, a Lender’s Mortgage Insurance fee is charged. This can amount to tens of thousands of dollars, depending on the property value and the amount borrowed.

A Family Guarantor loan avoids this. It lets the loan be structured so that most of it is secured by the property being purchased, up to 80% of its value. The remaining funds are secured by a guarantee against the parents' property.

Step-by-Step: Structuring a Family Guarantor Loan

Example 1:

• Sam and Alex are purchasing a property valued at $750,000.

• Stamp duty and other settlement costs amount to $45,000.

• They have cash savings of $120,000 to contribute to the purchase.

• This means that they need to borrow $675,000 to purchase the property.

• The Loan to Value Ratio (LVR) is 90%. Therefore, a Lender’s Mortgage Insurance fee of up to $19,000 would apply.

A Family Guarantee would split the loan into two parts:

Part 1: Loan of $600,000 secured against the new property at a Loan to Value Ratio of 80%

Part 2: Loan of $ 75,000 secured by both the new property and their parents’ property

Example 2:

• Sam and Alex are purchasing a property valued at $750,000.

• Stamp duty and other settlement costs amount to $45,000.

• They have no cash savings to contribute to the purchase.

• This means that they need to borrow $795,000 to purchase the property.

• They would generally not be able to borrow more than the value of the property so could not consider this purchase.

A Family Guarantee would split the loan into two parts:

Part 1: Loan of $600,000 secured against their new property at a Loan to Value Ratio of 80%

Part 2: Loan of $195,000 secured by both the new property and their parents’ property

Key Considerations for Borrowers and Guarantors

Although they are helping with the security, parents are not responsible for the loan repayments. The borrowers are entirely responsible for the repayments and must be able to demonstrate their capacity to service the loan.

The bank will undertake a full valuation of the parents’ property to ensure that there is enough equity for the guarantee. The total lending secured by the parents' property cannot usually exceed 70% of its value. This includes the guarantors' home loan and the new guarantee.

The new loan will usually be set up with a 30-year loan term. However, we aim to review the loan on a regular basis and arrange to have the guarantee removed as soon as possible. Once the two loans' total is at most 80% of the property's value, the security guarantee can be removed. Historically, we have found that this can occur in a timeframe of 4 to 5 years.

A security guarantee is often provided by parents. But, any close family members (e.g. siblings) can offer it.

The family member’s property must be in Australia and must have a freehold title (e.g. Torrens Title, Strata or Community Title).

What are the risks to the guarantors?

If the borrowers are unable to keep up with repayments on the loan, they may need to sell their home. If the property sells for less than the loan balance, the guarantor will be responsible for the debt.

A security guarantee uses equity in the parent’s property. This could affect the guarantors' other plans, like buying an investment property or using home equity for renovations.

Ready to explore if a Family Guarantor loan is the right solution for you?

Contact us today for a free consultation, and let’s discuss how we can help you achieve your home ownership goals!