Family Pledge Home Loans In Australia
Friday, June 13th, 2008 Subscribe To Our Feed
Most young borrowers are aware their family members, usually their parents, can act as guarantors when they purchase their first vehicle. But many borrowers in general are not aware they can act as guarantors for a home loan.
This is an option that allows family members to provide a guarantee in support of a borrower’s home loan application by using equity in their own property as security for the loan. So, they can assist other family members in maximising the amount they can borrow - bridging the deposit and upfront expenses gap, and hence avoid lenders mortgage insurance (LMI).
First homebuyers in the 20 to 30 year age bracket and low to mid income range are usually the borrowers who choose this loan option, which has been in place for a few years now and works for both home and investment property loans.
A borrower - whether individually or going into a joint loan with others - can receive, or maximise, the amount they can borrow against their purchase property.
People are finding it is harder, and taking longer, to save money they need to enter the home loan market. Particularly while there are stamp duty concessions for first homebuyers, borrowers are saying ‘we’re not quite ready yet but let’s enter the market while prices are still relatively low’.
The guarantor situation is most likely to occur when a borrower’s savings history (borrowing power) and/or deposit doesn’t quite stretch to meet lenders’ requirements for a home loan.
It is targeted at those with good ability to repay a home or investment property loan but who lack the sufficient equity to secure the additional funds they need to meet upfront loan costs and associated expenses.
The benefits for the borrower are that it allows them to maximise the amount they borrow - sometimes up to 100% of the purchase price, plus additional costs (such as stamp duty) - and helps reduce or avoid LMI, which can be up to $10,000 or more. All by using the guarantor’s home security value/equity.
And of course, it allows them to enter the property market - as long as they can service the loan in their own right!
Seeking independent legal advice prior to signing is an important consideration; so all parties fully understand their obligations to the home loan.
The guarantor can ask to be released from the guarantee at any time but the key message is they are liable to meet the home loan repayments if the borrower cannot. In that case, the lender may move in on the borrower’s home and sell it, and if the sale doesn’t cover the remaining loan amount the guarantor could lose their home. A mortgage broker can explain this process in more detail.
Borrowers aren’t usually aware of being able to use a guarantor for their home loan unless they visit a mortgage broker. Obviously, lenders are more likely to push for a ‘regular’ home loan situation that involves less risk on the lender’s behalf.
An important point to note is that the guarantor need not have their name on the home loan for its entire term. It is only needed until the borrower manages to achieve sufficient equity in the home they’ve purchased and then the guarantor can be released. This doesn’t affect the loan in any way but most fill out a new application and pay a variation or application fee, which is usually around $300 depending on the home loan contract.
Another point to note is that not all lenders accept guarantees but there are many lenders who do. It is certainly worth looking into if it means home ownership is within a borrower’s reach!
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