Introducing the Family Guarantee
First Home Buyers (FHB) often need a little bit of help to purchase their first home. And sometimes that help is in the form of a guarantee from family members.
A guarantee is simply a contractual promise made by one party (the guarantor) that they will pay a debt owing to a lender if the borrower fails to pay it. Guarantees are commonly provided as security for loans and can be very useful for borrowers such as First Home Buyers. At BOQ we’re here to help provide a guarantee option that is simpler, less risky and more accessible for First Home Buyers and their families.
What is the Family Guarantee?
BOQ have introduced the Family Guarantee to help First Home Buyers to get a leg up in the property market. It provides an easier path for immediate family members of FHB to enter into a guarantee arrangement with us with less lengthy documentation, which could decrease risk and provide several benefits. It could even allow FHB to borrow up to the full purchase price of the property, and to avoid the costs associated with lender’s mortgage insurance (LMI).
How Does the Family Guarantee Work?
So how is a Family Guarantee different from other guarantee structures? Well, unlike a loan supported by a traditional guarantee, the finance is structured into two separate loans. One loan is not secured by a Family Guarantee, whilst the second loan is and the borrower is responsible for the repayments on both loans.
A Family Guarantee is limited to a portion of the loan amount (it’s generally only in the range of 20% of the full amount of the purchase price), this means the risk is limited as well. And when the loan amount drops below the 80% loan-to-value ratio threshold, the guarantee is no longer required.
What are the Benefits of the Family Guarantee?
The Family Guarantee may give FHB and their guarantor families greater confidence and ease when entering into a guarantee relationship.
Benefits to FHBs:
- Avoid Lenders Mortgage Insurance and additional costs associated with LMI
- Purchase a home without a house deposit
- Increase your home buying budget
- Access lower interest rates
- Get into a new home with simple documentation and an easy process
Benefits to Guarantors:
- Decreased risk by limiting the amount you are guaranteeing
- Similar to a traditional guarantee, there is no need for the guarantor to make loan repayments
- Formal loan and guarantee documentation makes the financial arrangement crystal clear, when a cash loan between family members can create risk and uncertainty
- Streamlined documentation reduces the complexities around the application and the provision of security
- In the case of a borrower default, the guaranteed loan will be paid down first by the sale of the home
- The Family Guarantee can be released when loans drop below the 80% LVR
Example of the Benefits of the Family Guarantee
Borrowers Lisa and Andy are buying their first home for $650,000. They have savings of $20,000 which they’ll need to cover government costs of approximately $20,000. So, they will need to borrow the full purchase price of the home, which is $650,000.
Lisa’s parents have a mortgage-free investment property valued at $500,000. Under a traditional guarantee arrangement, the guarantor would need to guarantee the full amount of the loan – $650,000. However, under a Family Guarantee arrangement, the additional security support is limited to the $130,000 from the Family Guarantee.
The Family Guarantee has improved the security position of the overall loan and limits Lisa’s parents’ liability as well.
Requirements of the Family Guarantee
The Family Guarantee from a guarantor who is either a parent or a sibling of one of the First Home Buyers, and who has a mortgage-free residential property to use as security can support a loan to buyers who are looking to purchase their first home to live in. The buyers must also have the capacity to repay the total loan amount (without relying on the guarantor’s income) and the guarantors must also have an income.
Of course, if you are interested in the Family Guarantee, but don’t fit the precise requirements, please speak to a BOQ lending specialist. Our specialists may be able to help you find the solution you need.
Is the Family Guarantee Right For You?
Choosing to get a loan with a Family Guarantee is a completely personal decision. You’ll need to consider your own personal financial and legal situation, your unique circumstances, desired outcomes, and whether you’re the potential borrower or the potential guarantor.
Using this structure could help you to purchase a home sooner. That means you could enter the housing market sooner, stop paying rent and start building equity.