Is your adult child (and his girlfriend) still living at home because they are trying to save money for a home loan deposit? Sometime referred to as the George Constanza Effect, it's a term that refers to adult children who regulalry return home to their parents and do so mainly due to housing affordability issues.
Housing affordability is significant issue for many young Australians trying to get a toe hold in the property market. As a family member, you may be in a position to provide a helping hand in the form of a family guarantee loan. This is when the equity in your home is used as security on a loan for a family member, usually a child.
A Guarantor Loan can be a WIN:WIN
Also known as a family pledge loan, a guarantor home loan it is a type of mortgage that allows your child to borrow more money and provide less of a deposit. Usually when a loan is more than 80% of the purchase price (80% LVR) you will have to pay lenders mortgage insurance, but a family guarantee means you won’t have this extra expense.
It’s even possible to avoid paying any deposit because the equity in your family home can act as a deposit. This ‘guarantee’ makes it possible for your child to borrow the full 100% cost of the home, plus stamp duty and legal fees. Lenders mortgage insurance will still be payable if they borrow over 80% of a property’s value.
There are many issues to consider when taking out family guarantees and it pays to keep in mind that loan terms and conditions can vary between lenders. Not all lenders even offer these type of loans, so give us a call and we can advise you which lenders would best suit your situation.
Here are some of the common questions we get asked about guarantor loans. For more detailed information about any of the following, don’t hesitate to get in contact.
Does the entire loan have to be guaranteed?
No, the loan can be split, enabling the equity in your family’s property to be used as security for a small portion of the loan, for example 20%. The lender will take a mortgage out over the guarantor’s property to this specified amount.
Who can act as guarantors?
Guarantors are usually parents, but some lenders under certain conditions will accept grandparents, siblings, a de facto partner or a former spouse. To be approved by a lender they must provide enough equity to cover the amount being guaranteed and show proof of income. Normal lending criteria will apply in all circumstances.
What are the risks for the guarantor?
There are risks involved, which is why it is important for the guarantor to know what they are getting into. Some lenders even require legal advice is sought to ensure the guarantor understands that if there is a default on repayments, they will be the ones held liable.
How long does the guarantee have to be in place?
If the loan is structured correctly, the guarantee doesn’t need to be in place for the entire duration of the loan. Once you have repaid the portion of the loan that is guaranteed or your property has increased in value, the guarantor can be released.
David is a small business owner in his early 40s who runs a technology business. David and his wife Mary were seeking to pay out their existing Low Doc loan and move to a better rate. They were also looking to secure a larger loan for the purchase of a new property in the inner east suburbs of Melbourne.
David hadn't previously considered a guarantor loan until he worked out exactly how much he needed to borrow. He quickly realised that the loan-to-value ratio (LVR) was going to be too high and he would be facing hefty mortgage insurance charges.
"I was looking to purchase a new property, but didn’t fully appreciate what I needed to know until I met with the mortgage specialist, Ian from Collins Home Loans. Ian took the time to listen to my situation and understand my position" he said.
"My parents ended up becoming our guarantors for my loan. The Collins Home Loans mortgage broker, sat down with my parents and helped them understand what was involved, so they felt reassured with the whole process. I was impressed with how much time he took to understand my situation and, because of this, he was able to offer solutions that matched my needs; a solution that I hadn't even considered until we met." he said.
If you would like to discuss whether a guarantor loan would suit your financial circumstances, contact Collins Home Loans. Our mortgage brokers will ensure you get the best possible loan to suit your needs, and then support you right through the application process until the loan settles.
IT'S IS NEVER TO EARLY TO CHAT WITH A MORTGAGE BROKER