Understanding family guarantee home loans

Saving up the initial 20 per cent deposit on a home is not an easy task, but it may be achievable if you have the support of your family. There are a few ways your parents can help you secure a home loan and vice versa. A family guarantee home loan is one such method that could allow you to purchase a home. 

How does a family deposit mortgage work?

In a family deposit mortgage, a family member acts as a guarantor during the home loan application process. Having a guarantor could help to increase your borrowing limit and help cover the lender's risk in case of defaults.

Generally, family members use the equity in their own home as security, though in some cases they can also use cash savings in a term deposit or the like. This means your guarantor does not have to pay anything to help you increase your borrowing power, though the guarantor becomes liable to pay the entire loan amount if you default. 

If you opt for a limited guarantee, your guarantor will only be liable to pay for part of the home loan. You should first ensure that they have enough equity in their own home to cover the limited guarantee. 

When should you consider a family guarantee home loan?

Many borrowers consider family guarantee home loans when they do not have enough savings to pay for the initial 20 per cent deposit required in order to purchase a home. A family home loan can save them the extra cost of Lender’s Mortgage Insurance (LMI).

Who can be your guarantors?

Typically it's your close family members who can become guarantors for your home loan. This may include your parents, siblings, children, uncles, aunts and spouses. But there are some banks that will only accept your parents as your guarantors in a family deposit mortgage. 

What are the different structures of a family mortgage?

A family guarantee home loan can be structured in a few different ways:

Parents as guarantors for their adult child

By far, this is the most common structure of family mortgage. Often parents will use their home equity to become guarantors for their children. This structure works like a standard guarantor home loan. However, in case of default, the parents will be liable to pay off the entire amount. If the parents fail to come up with the money, they might have to sell their house to compensate the lenders. 

Adult children as guarantors for their parents

As you become older, the banks may start restricting your borrowing power. Even your loan term may be reduced if you are above the age of 40. This is because once you retire, the risk borne by the lenders drastically increases. Therefore, lenders reduce the term of the loan to ensure that your mortgage has been repaid by the time you are in your 60s.

If you are buying a house after the age of 50, you need to furnish various documents and an exit strategy that ensures that the loan is repaid before your retirement. In such cases, to make borrowing easier, you can ask your adult employed children to become your guarantors. 

Buying the property together with your family

When your close family decides to buy an investment property, a lender may offer a family home mortgage where everyone is responsible for their part of repayment. Furthermore, the lenders may offer the option of splitting the loan amount into various accounts to make it easier for the involved parties to manage their finances. 

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