What is a Family Guarantee and Should You Consider One?

Buying a house tends to be most people’s biggest purchase of their life. With house prices constantly increasing, more buyers are needing all the help they can get to buy a home.

Whether it’s a helping hand for first home buyers to get their foot in the property market, or for growing families to upgrade to a bigger home, younger generations are often turning to their older family members for assistance.

Let’s take a look at the ins-and-outs of a family guarantee and the potential advantages and disadvantages of using them.

What is a family guarantee or pledge?

A family guarantee – also known as a family pledge – is a type of loan that allows you to use a family member’s home as security for your mortgage. By using another family member’s home, you likely won’t need such a big deposit since their home acts as the collateral.

It’s basically a way for family to help you out without having to give you cold, hard cash. But before you ask your parents or other family members to help you out, it’s important everyone is on the same page and understands exactly what they’re agreeing to.

While family guarantees used to involve the whole of a family member’s property, nowadays family guarantees may be limited to a certain percentage. For example, a family member’s property might guarantee 20% of the home loan – so generally the deposit – while the property being bought acts as security for the other 80% of the home loan. This set up offers lenders a bit of protection if the first home buyer struggles to make repayments or defaults on their mortgage.

What is the advantage of having a family guarantee?

The biggest advantage of family guarantees lies with the first home buyer.

Family guarantees may help them buy a home while avoiding the extra cost of mortgage insurance. They might even be able to borrow a bit more money. But the family member who is acting as guarantor needs to guarantee at least 20% of the property’s purchase price if the buyers don’t have the 20% deposit available.

Of course, it helps if first home buyers speak to their finance specialist early on to explore their options and make sure they understand what they – and their family members – are committing to.

Additionally, first home buyers may still be eligible for their state’s first home buyer/owner grant. Be sure to check out all the terms and conditions of your state’s grants.

What is the disadvantage of having a family guarantee?

While first home buyers benefit from family guarantees, the family members providing the guarantee may be at a bit of a disadvantage.

The family member’s home that’s acting as security might be at risk if the first home buyer defaults on their mortgage. This is why it’s so important family members get their own financial and legal advice before signing anything. It’s best to know upfront who is responsible for what and what’s going to happen if the buyer defaults – nobody wants any unpleasant surprises or future family dinners ruined.

Also, keep in mind not all lenders accept family guarantees so be sure to do some research on who offers them and their terms and conditions.

Should you consider a family guarantee?

If you’re thinking about using a family guarantee to get into the property market, then it’s essential everyone understands their role and responsibilities.

Since everyone’s financial situation is different and the internet is full of general information, you could chat with your local home loan specialist for some personalised advice.

Buying a home doesn’t need to be mind boggling. Get in touch with Pania for some personalised mortgage advice.

Your complete financial situation will need to be assessed before acceptance of any proposal or product.