Embarking on the journey to your first home can be an exciting yet challenging endeavour.

Saving up for a deposit often takes time and patience. However, there's a way to potentially fast-track your homeownership dreams: by enlisting the support of a family member to act as a guarantor. Many lenders offer this option, allowing parents or close relatives to use the equity in their property as collateral for your home loan, eliminating the need for you to save the entire deposit.

How Does It Work?

With a family pledge guarantee, your parents or close family members can pledge their home as security for your loan, reducing the deposit you need to save.

Let's break it down with an example:

Imagine you're eyeing a house valued at $600,000. Typically, you'd need to save a minimum 5% deposit, which amounts to $30,000. However, to avoid paying mortgage insurance, you'd need a deposit of at least 20% of the purchase price, which translates to $120,000 – an additional $90,000 you'd need to save.

Now, let's say your parents own a home worth $900,000 and are willing to assist you. They offer the $90,000 not as cash but as security for your loan. This means the lender will accept their home's equity as security, allowing you to skip the mortgage insurance premium and forgo the need to save that extra $90,000.

As your home's equity reaches 20%, both you and your parents can request the lender to release the guarantee. It's important to note that the guarantor's security (i.e., your parents' home) covers only a portion of the loan amount, replacing the need for the full deposit.

How Does It Differ from Being a Co-Borrower?

A crucial distinction lies in the roles of guarantors and co-borrowers. A co-borrower is responsible for the entire loan until it's fully repaid, whereas a guarantor is linked to the loan by a guarantee and is responsible for the specified amount in the guarantee. Importantly, a guarantor's responsibility ceases once the guarantee is released, even if the loan hasn't been fully repaid.

Who Can Be a Guarantor?

Typically, guarantors are limited to immediate family members, such as parents, siblings, and grandparents. However, certain conditions apply, including the requirement that the guarantor must have sufficient equity in their property and a reliable source of income. For instance, if your parents' home is valued at $900,000 but they have a mortgage of $800,000, there may not be enough equity to support the guarantee.

Benefits for First Home Buyers

The primary advantage of a family pledge guarantee is the potential to avoid or significantly reduce Lenders Mortgage Insurance (LMI). LMI is a one-off fee paid by borrowers to protect lenders against financial loss in case of mortgage default. Typically, lenders require LMI when borrowers have a deposit of less than 20% of the property's value.

However, as the borrower, it's crucial to ensure you can comfortably manage the loan repayments with your income. Always consult with your broker to assess your ability to meet the required repayments.

Other potential benefits of a guarantor home loan include:

• Reduced deposit requirements.
• Quicker entry into the property market.
• The ability to secure the home you truly desire, rather than settling for a more affordable alternative.
  
  

While the advantages of having a guarantor are clear, it's essential to weigh the potential risks. Guarantors should carefully consider their financial capacity to cover mortgage repayments and fees if the borrower cannot. It's prudent for both parties to seek independent legal and financial advice before proceeding, a step often insisted upon by lenders before accepting a guarantee.

Understanding the obligations and conditions of a family guarantee is paramount to a smooth process. Open and transparent communication is key to preserving family relationships. Therefore, ensure both you and your guarantor thoroughly comprehend all aspects of the arrangement before finalising it.

This guide serves as a starting point to help you ask the right questions and identify critical considerations. It's important to note that normal lending criteria and bank policies apply to guarantor loans, so discuss your borrowing eligibility with your mortgage broker.

Remember, this is your pathway to homeownership, and having a family pledge guarantee can make your dream home a reality sooner than you think.