For many home buyers, saving a deposit to purchase a property is a very slow and arduous task.
It becomes almost impossible when you factor in today’s high cost of living and renting somewhere to put a roof over your head.
You may think that no deposit home loans are a thing of the past. But a family guaranteed home loan remains a viable way for many home buyers to get on the property ladder.
If you’re eligible for a family guarantee home loan, what are the benefits and risks involved with this type of loan?
What is a family guarantee home loan?
I’m not telling porky pies: you can still find a no deposit home loan these days.
The key is having a family member with enough equity in their property to act as a guarantor for you and to make up the shortfall of deposit with their spare equity.
There are plenty of benefits and a few drawbacks of this strategy. The guarantor and purchaser will need to carefully consider these before proceeding.
In order to be eligible for a family guarantee home loan:
- You must be an owner-occupier or, if you’re a first home buyer, you can buy the property as an investment
- Guarantors must be family members, including parents, grandparents, spouse, siblings, sons and daughters
- You can’t be looking to refinance
- You must not be looking for a loan ‘top up’
Key benefits of a family guarantee home loan
These are the main benefits:
- Helps you avoid the cost of lenders mortgage insurance (LMI), possibly saving tens of thousands of dollars
- Maximises the amount you can borrow – up to 100% of the purchase price plus legal costs and stamp duty to a total loan to value ratio (LVR) of 105%
- The guarantee amount can be limited to the exact amount required to make up the shortfall of a 20% deposit plus legal costs and stamp duty
- Some banks are happy to arrange a second mortgage behind the guarantor’s current lender if they already have a home loan in place and don’t particularly want to refinance it over to the new lender
- The guarantee can be released at any time by the guarantor; however, if the loan to value ratio is still above 80%, then LMI may be payable
Key risks with a family guarantee home loan
These are the main risks:
- The guarantor is guaranteeing a specific loan amount that will go towards reducing the guarantor’s borrowing capacity, should they decide to increase their own debt while the guarantee is in place
- If the borrower is unable to make their monthly loan repayments, the guarantor will need to step in and cover the repayment
- If the borrower and the guarantor are unable to make the monthly repayments, the borrower may be forced to sell their property; the guarantor may also have to sell their own property if the sale of the borrower’s property falls short of paying out the entire loan and they’re unable to make up the difference with cash
Example: a family guarantee home loan in practice
Michael is a first home buyer, planning on purchasing a property worth $650,000 in NSW.
He only has $32,500 (5% deposit) after accounting for his legal costs and needs to borrow the remaining 95%.
The lenders mortgage insurance (LMI) on this purchase would be around $27,000. What’s more, only a couple of lenders will let you capitalise the LMI premium when the LVR is that high.
If Michael’s parents are willing to offer some equity in their home or investment property and agree to a family guarantee to make up the shortfall of the deposit to bring the overall LVR down to 80%, (which is a limited guarantee of $121,900), Michael could avoid having to pay out $27,000 in LMI.
Is a family guarantee home loan a good option for you to consider as a first step in property ownership?
If so, contact our office and we’d be happy to guide you on your property journey.