A family guarantee is a strategy where a family member, usually a parent, uses the equity in their property as security for a portion of the borrower’s home loan. This can help the borrower secure a home loan without having to pay lenders mortgage insurance (LMI), which is typically required when the borrower has a deposit of less than 20% of the property’s purchase price. Here’s how it works:
Intention to use a family guarantee
The borrower applies for a home loan: The borrower applies for a home loan with a lender, indicating their intention to use a family guarantee.
Guarantor provides security
The guarantor provides security: A family member, often a parent, agrees to provide security for the loan to an amount that reduces the Loan to Value ratio to 80%, using the equity in their property. This means that if the borrower defaults on the loan, the guarantor’s property could be at risk.
Loan Approval
Loan approval: The lender assesses the application based on the typical servicability of the first home buyer, but considers the guarantor’s security in the loan assessment.
No LMI
No LMI required: Because the loan is now considered less risky for the lender with the additional security provided by the guarantor, the borrower doesn’t need to pay the lender’s mortgage insurance.
Loan Repayments
Loan repayment: The borrower is responsible for making all loan repayments. The guarantor’s property is only at risk if the borrower defaults on the loan and the lender is unable to recover the outstanding debt.
Risks
It’s important for both the borrower and the guarantor to fully understand the risks involved in a family guarantee arrangement. If the borrower is unable to meet their loan repayments, it could potentially put the guarantor’s property at risk. Additionally, the guarantor’s ability to obtain future credit may be affected, as the guarantee will be considered by other lenders when assessing the guarantor’s financial position.
