Parental Guarantees and Family Pledges
Buying your first home or investment property can be one of life’s greatest rewards. At Sphere Home Loans, we can help you do to this sooner. Utilising lending options such as a Parental or Family Guarantee means you don’t have to wait for years to save up the deposit which is generally required to get into the market.
With the help of a Parental Guarantee, you can leverage the equity in your parent’s home against the loan on the property you wish to purchase. Not only will you save on Lenders Mortgage Insurance (LMI), but you will also benefit from a lower interest rate, as from the bank’s perspective, your loan is deemed a lower risk than one with a smaller deposit and higher Loan to Value Ratio (LVR).
Technically it doesn’t have to be a parent who provides this guarantee for you, the guarantor could also be your grandparent or your sibling, as long as they have sufficient equity in their home to put down as security for the deposit on the property that you are looking to purchase. No money physically exchanges hands, the guarantee simply acts as a promise or substitute for a cash deposit.
At Sphere we highly recommend using a lender that limits the guarantee to just the amount pledged in place of the deposit and not to the entire Loan amount. If the family member has an existing mortgage on their property this is fine, they are generally not required to move lenders and equally you are not limited to use the same lender for your mortgage.
A common question regarding a Parental Guarantee is how long will it be in place for? The answer is actually quite simple - as soon as your loan amount is at 80% or less than the current market value of your property, the guarantee can be released, which frees up your family member’s property. This can happen in a matter of months when property values are rising quickly or may take several years in a market that has slowed.
There are lots of different scenarios and family members often have questions such as;
What if they want to sell their property and it still has a guarantee over it?
What happens if there is a default on the loan?
Can there be more than one guarantee at a time?
The answers to these questions and to any others you have can be easily answered during a meeting with your broker. The primary objective is to establish whether this is the right option for all involved. Parental or Family Guarantees are fantastic products that help people buy into a property sooner, however they also come with some risks and as such we recommend that you get independent legal and financial advice before entering into such an agreement.
If you have any questions around guarantees or to do with financing your home or investment property, feel free to reach out for a no obligation chat with one of our experienced brokers at Sphere Home Loans. There are no costs involved and we have a wealth of information to share.