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How to help your kids into their first home

Family guarantee home loans are nothing new. They’ve been around for over a decade as a way for parents, grandparents or siblings to help a family member get into the property market earlier than they otherwise would have.

How a family guarantee works

Let’s say that I want to purchase a property, usually my first home. And the property I would like is going to sell for $500,000.

Usually, the banks will need $100,000, or 20%, as a deposit if I want to avoid paying Lender’s Mortgage Insurance (LMI), which is seen by many as a burden to be avoided at all costs. But my savings only amount to $60,000, leaving me $40,000 short.

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Whilst that is a reasonable deposit, it puts me in LMI territory, having saved a deposit of only 12%.

In this situation, I can approach my parents or a sibling to provide the bank with a ‘guarantee’ for the $40,000 shortfall.

And these days, that guarantee can be ‘limited’ to just the amount that’s required.

This guarantee is a promise to the banks that if I can’t repay my mortgage or find a tenant to do so, the family member that gave the guarantee will be responsible.

And if they can’t, the bank can legally come to them to pay back any losses incurred once they sell my property and pay off the remaining loan.

Many parents are fearful of being liable for an extra $500,000 mortgage.

However, remember, at the very worst, the amount you will be liable for will be the lesser of the difference between the loan outstanding and the amount the bank sells the house for, or the limited amount you guaranteed in the first place.

This could still be $40,000 in the above case. And this is where the guarantor needs to have a strategy in place to ensure that if the worst case happens, regardless of how unlikely it may seem, they could find that money without selling their own property.

This is where the ‘limited guarantee’ comes in handy, as it is limited solely to the amount a family member chooses to provide.

In the past, banks also allowed family members to provide guarantees on the servicing of loans so that someone with a low income could purchase a house they technically couldn’t afford if their family member agreed to assist with repayments.

The servicing guarantee loan is no longer in play these days after responsible lending laws came into effect in 2011. Additionally, with tighter lending conditions prevailing, even if a family member is willing to provide a guarantee, the banks still may decline an applicant simply because their income is too low.

Whilst Generation Y has the propensity to make a high enough wage to afford the loan, their lifestyles have changed to a point where saving the $80-150,000 required to get a home loan seems nearly impossible, making the family guarantee an attractive option for some.

Eventually, whether through market appreciation over time, paying down of the mortgage, or active development strategies to unlock equity in the home, that family guarantee can be removed, and both guarantor and homeowner can breathe a sigh of relief.

 

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