If you are struggling to get a deposit together, a “guarantor” can help you buy your property sooner. A Family Guarantee or Family Pledge, is when a family member provides their property (or cash savings) as an additional security for a home loan.
How does it work?
Let’s say for example that you are a first home buyer wanting to purchase a property for $500,000 but your deposit is only $50,000. To avoid an expensive fee called mortgage insurance, you should try to keep your borrowing percentage at 80% of the property value which would be $400,000. This would leave you short of $50,000 and here is where the guarantor would come in! The bank will essentially register a mortgage on the property you are purchasing for $400,000 AND a further $50,000 on the guarantor’s property. Over time, if the property you purchased increased in value enough to keep the overall mortgage of $450,000 OR you have paid the loan down significantly, you are then able to ‘release’ the guarantor’s property.
Who can be a guarantor?
Generally speaking, only immediate family members can be guarantors, and most lenders would only allow parents, guardians, or grandparents as guarantors. Occasionally a spouse may be used as a guarantor if it is suitable.
What are the implications for the guarantor?
The primary risk for a guarantor is in the case when the borrower defaults on payments. The guarantor may then be required to assist in repaying the loan, and if they are unable to do so, the bank is able to sell the asset of the applicant, and recover any losses from the guarantor up to the guarantee amount. The guarantee may also impact the guarantor from being able to access equity in their property for other borrowings.
What if the guarantor sells their property?
In the instance the guarantor wants to sell their home, the guarantee must be replaced with cash or an alternate property.
There are inherent risks for the borrower and the guarantor in a family guarantee situation – legal and financial advice is recommended for any person looking to provide a guarantee.
Applying for Family Guarantees isn’t always straight forwards, so if you’re considering this as a financing option and want to learn more, we would be more than happy to walk you through the process and support you along the way, making it Easy, Peasy.
If you want to find out more about anything you’ve seen here or would just like a chat, give us a call on 1800 3 Peasy (73279).