Family Guarantee
Home Loan
Family guarantee home loans are a way to borrow 100% of the purchase price and can offer many benefits for borrowers.
Family Guarantee (sometimes called Family Pledge) loans are one way to borrow 100% of the purchase price. There are great differences between the guarantor/family guarantee loans offered by different lenders and some lenders do not offer family guarantee products at all.
With the help of a guarantor you can borrow 100% of the purchase price, plus purchasing costs such as stamp duty (if applicable) and your lawyer/solicitors costs. Most lenders will cap the loan amount at 100% of the purchase price plus reasonable costs with a family guarantee. This allows you to purchase a property without any savings whatsoever. The standard policy (as at September 2022) by most Australian banks, lenders and mortgage insurers for savings is 5% of the purchase price.
How does Family Guarantee work?
Example 1 of a typical Family Guarantee when purchasers can cover costs associated with the purchase.
House to be purchased of $500,000.
Loan Amount Requested $500,000 which is 100% of the purchase price. This is also referred to as loan valuation ratio (LVR). LVR is therefore 100%.
Family Guarantee is limited to 20% of the purchase price in this case which is $100,000. A mortgage is put on the guarantors’ property for $100,000. This is a limited guarantee (see explanations below).
Example 2 of a typical Family Guarantee when purchasers need to also borrow the costs associated with the purchase.
House to be purchased of $500,000.
Loan Amount Requested $520,000 which is 104% of the purchase price. This is also referred to as loan valuation ratio (LVR). LVR is therefore 104%.
Family Guarantee is limited to 20% of the purchase price plus costs in this case which is $120,000. A mortgage is put on the guarantors’ property for $120,000. This is a limited guarantee (see explanations below).
Example 3 of a typical Family Guarantee when purchasers have some deposit available.
House to be purchased of $500,000.
Loan Amount Requested $470,000 which is 94% of the purchase price. This is also referred to as loan valuation ratio (LVR). LVR is therefore 94%. The purchasers in this scenario have $45,000 in savings which covers $30,000 deposit plus purchasing costs associated with the purchase.
Family Guarantee is limited to $70,000 in this case. A mortgage is put on the guarantors’ property for $70,000. This is a limited guarantee (see explanations below). The guarantee in this case is reduced to 14% of the purchase price.
With all 3 scenarios above, banks are ensuring that the Guarantee Amount reduces the LVR on the purchase property to 80%. An LVR of 80% ensures that NO Lenders Mortgage Insurance is required.
The benefits of having a guarantor
Family Guarantee loans have great benefits for borrowers:–
- – Avoid paying Lenders Mortgage Insurance (LMI) which will save you money.
- – You can borrow more money, as servicing is not based on mortgage insurers’ servicing methods.
- – You may be able to consolidate some minor debts such as credit cards when you buy your home.
- – You do not need a deposit, allowing you to buy a home now at today’s prices.
- – Cheaper interest rate at banks/lenders that offer higher discounts based upon reduced loan valuation ratios.
Types of Guarantees
Security guarantee: The guarantor uses real estate that they own as additional security for your loan. If the guarantor already has a loan on their property then in most cases the bank can take a second mortgage as security. This type of guarantee is most often used when first home buyers are buying a home, have an excellent income, but no deposit. The guarantor is also called an “equity guarantor” by some lenders.
Servicing guarantee: An income/servicing guarantor is most often a parent helping their son or daughter who doesn’t qualify for the loan that they require to purchase their property. The lender will use the parents’ income as well to determine maximum borrowing limits. These have been typically used in combination of security guarantees above. Since the introduction of Australia’s new credit legislation post GFC, servicing guarantors are considered inappropriate for family guarantees in most cases. They are however used in other situations with directors/shareholders/beneficiaries and their companies/trusts.
Limited guarantee: A limited guarantee is where there is a fixed amount that may be called upon by the lender to the guarantor in the event of default. Guarantees can be either limited or unlimited traditionally and it is our view that only limited guarantees should be considered to reduce risk to the guarantor.
With any guarantee limited or otherwise we strongly encourage the guarantor to seek independent legal advice. Some lenders make it a requirement that legal advice is obtained.
CONTACT US if you would like to discuss whether a family guarantee may be suitable for your situation.