Family Guarantees, First Home Buyer Loan Solution

Part 1

Introduction: Could a family guarantee be the solution you’re looking for?

Over the next few weeks we’ll be talking about family guarantees, which are popular among a diverse range of buyers, such as first homebuyers and buyers looking to ‘trade up’ or buy an investment property. 

Essentially, family guarantees offer the means to “buy time” – but, if you’re thinking about using a family guarantee, it’s important to take the time to understand how they work and establish an exit strategy. 

In part two and part three of our series, we’ll look at the exit strategy and how a family guarantee might be useful if you’re planning to trade up or invest.

Today, we look at the three basic options family guarantees offer borrowers.

While it’s not necessarily always the case, for simplicity’s sake we use parents and children in our examples:

Option 1:  Security support

This is where parents offer their house as security for the amount their children need to borrow. For example, if a child buys a home for $400,000 and borrows 80 per cent of the value ($320,000) from the bank, they need to borrow the $80,000 deposit and stamp duty of around $15,000 – that’s a total of $95,000. Consequently, a loan of $95,000 is then taken over the parents’ house. 

Option 2:  Service support

In this situation, children have the deposit but cannot afford the repayments on the size of the debt, so the parents guarantee the repayments are made, but do not offer their house as security – just whatever is needed to ensure repayments are made.

From the lender’s perspective, the parents are just as liable for the debt. This option might be considered if the child was completing an apprenticeship, traineeship or other studies, knowing that in a year or two they will earn incomes that enable them to meet repayments on their own.

Option 3: Security and service support:

In this scenario children do not have enough deposit or equity and may also fall short on their ability to make repayments. In these circumstances the parents offer income support as well as security.

Importantly, family guarantees offer a solution for people in this and many other circumstances.

Of course, there’s no ‘one size fits all’ approach in finance, so if you think a family guarantee might be right for you, seek the advice and guidance of an experienced mortgage adviser who is familiar with family guarantees and lenders’ requirements.

Click here to read part 2 in our series on family guarantees.