A Family Guarantee, Family Pledge or Guarantor Loan allows family members (generally a parent, grandparent or in-law) to use the equity in their home as additional security for a portion of your loan amount.
This means, you may be able to avoid lender's mortgage insurance and possibly reduce your deposit requirements.
The lender (i.e. bank or finance institution) will generally take a limited guarantee of 20% (as an example) and mortgage this over the guarantor's property and the remaining 80% will be mortgaged or secured against the borrower’s property.
It is important to note that many lenders will not use a guarantor's primary place of residence in a guarantee unless the guarantor has other substantial assets.
On a loan of $400,000, Lender’s Mortgage Insurance is around $8,000, which can be difficult to manage for many, especially first home buyers. By having a family member as Guarantor for a portion of the loan, hence reducing your Loan to Value Ratio to less than 80%, you can avoid this LMI expense.
Get into the market sooner
Depending on the status of your guarantor and your deposits, your savings requirements maybe a much smaller amount, so you can get your loan approved sooner and start enjlying your new home.
Guarantor status not fixed
As you progress through your loan repayments and build your own equity there is an opportunity to remove the guarantee application, which gives you independence without having to rely on someone else being liable.
Avoiding Lender’s Mortgage Insurance
By taking on a guarantor you can achieve the required 20% LVR required to avoid having LMI applied.
Increased lending options
Having a guarantor on board means you can increase your borrowing potential to 107% on the new property value without a deposit required.
No need for Genuine Savings
With a guarantor you don’t need to provide proof of 5% genuine saving
Lower Interest Rate
Since you have a lower LVR (i.e. below 80%) you can enjoy an optimum interest rate.
Liable responsibility
If for any reason you cannot make your repayments then your family remains liable for the debt portion they guaranteed, however, you should never take on a loan contract that you can’t feasible manage with your current situation.
Additional fees
With the Family Guarantee you may need to pay extra fees for the guarantor documents to be prepared
To get you started we have collated all of the questions we have been asked by our first home buyer clients, check out our First Home Buyer FAQs, or download our handy First Home Buyer Checklist.
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