Saving a deposit for a first home can feel like you’re on a treadmill – as hard as you try to keep up, house prices just keep rising. Many lenders require a 20% deposit, and if you haven’t saved that much, charge Lenders Mortgage Insurance (LMI). But there’s a way to fast-track the process, with a bit of help from family. Read on to see how you could get into your first home sooner and avoid the cost of LMI with a family guarantee.

What is a family guarantee?

A family guarantee, or family security guarantee, is when a family member (the guarantor) uses the equity in their own home as security to guarantee part of your mortgage.

By providing a guarantee for the amount you need to reduce your loan to value ratio (LVR) to 80%, you won’t have to pay Lenders Mortgage Insurance (LMI) or save anything more for your deposit.

How does a family guarantee work?

Here’s a simple example to help you understand how a family guarantee works:

Say you want to buy a house for $500,000 but you’ve only saved $50,000 – that’s 10% of the purchase price.

To avoid paying Lenders Mortgage Insurance (LMI), most lenders ask for a 20% deposit – which in this case would be $100,000.

That means you still need to save $50,000 unless someone in your family can help.

If your parents own their home, they can offer $50,000 of their home’s equity as security for your loan. So you won’t have to save any more or pay LMI.

Once you’ve paid off enough of your mortgage – ideally 20% of the property’s value - the guarantee can be removed, and your family member is no longer tied to your loan.

What are the risks and benefits?

A family security guarantee is a great way to fast-track your home ownership journey, particularly if you’re struggling to save a big enough deposit. But it’s a serious commitment for both borrower and guarantor and, as with any financial decision, it’s essential you understand the benefits and risks.

For the borrower:

• A family guarantee could help you get into your home sooner instead of waiting years to save a big enough deposit.
• It helps you avoid paying Lenders Mortgage Insurance (LMI) which can amount to thousands of dollars in extra costs.
• Getting into the property market sooner lets you start building equity earlier by paying down your mortgage and taking advantage of improvements in value.
• Even though you’re getting help with your deposit, you still need to meet bank’s lending criteria and demonstrate you can afford your repayments.
• The borrower is responsible for repaying the full loan, and if you fall behind on your repayments, your credit score and that of the guarantor’s could be impacted.
• Until you build enough equity in your home to release the guarantee, refinancing or selling the property can be tricky.

For the guarantor:

• Acting as family guarantee is a way to help a family member achieve home ownership without giving them any cash or selling any assets.
• With a family guarantee, you offer part of your home’s equity as security for the loan, without having to release any funds.
• Because your property is being used as security, if the borrower defaults on the loan and the home is sold at a loss, you could be asked to cover the shortfall up to the guaranteed amount.
• Acting as guarantor can impact your own financial situation by limiting your ability to borrow, as lenders consider guarantees a liability that can impact borrowing power.
• Money and family can be a tricky mix! If things don’t go according to plan, it could affect your relationship with the borrower.

Get help with the next steps

A family security guarantee is a big decision to make, so it’s important both borrower and guarantor understand the conditions and their obligations and carefully consider whether it’s the right arrangement for them. For the guarantor, a separate interview will be required, and they’ll need to seek their own independent legal advice.

Get help understanding the complexities of family security guarantee arrangements. Contact Mortgage Express today to connect with a broker near you. Our team is experienced at helping borrowers and guarantors understand how these agreements can fast-track home ownership while avoiding the pitfalls.

While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Finservice Pty Ltd (Mortgage Express) for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication. A Disclosure Statement is available on request and free of charge.

Finservice Pty Ltd (Mortgage Express) is authorised as a corporate credit representative (Corporate Credit Representative Number 397386) to engage in credit activities on behalf of BLSSA Pty Ltd (Australian Credit Licence number 391237) ACN 123 600 000 | Full member of MFAA | Member of Australian Financial Complaints Authority (AFCA) | Member of Choice Aggregation Services.