Family guarantee home loans part 2

Part 2

The Exit Strategy: Could a family guarantee be the solution you’re looking for?

Last time we brought you part one of a three-part series looking at family guarantees. 

In part one we looked at the three basic options family guarantees offer borrowers.  Today, we’ll take a look at the exit strategy.

An exit strategy is a plan designed to release the guarantors (usually parents) from the loan to fund the buyer’s home as soon as possible.

This comes as a relief for the guarantor, who doesn’t want the burden of a 30-year loan on their property limiting their options, including the ability to sell their house.

To exit a family guarantee, it’s a good idea to have the home being purchased revalued down the track to assess the property’s equity, which can be used to release the guarantors.

Let’s use an example whereby a parent has decided to guarantee a loan for their child for a home purchased at $400,000.

Generally, we’d look at having the property revalued in about five years’ time and, assuming it increased in value to $500,000, the child could then get an 80 per cent loan for $400,000 and the parent could be released from the loan.

In this example, the child now has enough equity in the property in their own right to not need the guarantee. And, as a result of the family guarantee, they have saved about $9000 in LMI (Lenders Mortgage Insurance) on the initial purchase.

Next time we’ll talk about using a family guarantee for buyers looking to ‘trade up’ or invest. 

Click here to read Part 1 in our series on family guarantees.