Entering the property market can be challenging for first-home buyers, especially with rising property prices and strict lending criteria.
One possible solution is a family guarantee, where a parent or close relative helps secure the loan.
One of the biggest benefits of a family guarantee is that it allows first-home buyers to enter the property market sooner, while avoiding the need to pay Lenders Mortgage Insurance (LMI).
However, before proceeding, it is essential to understand the financial implications, risks, and alternative options available.
Understanding your financial position as a Guarantor
Before becoming a guarantor, it is crucial to assess whether you are financially capable of covering the loan if the borrower is unable to make repayments. Financial disruptions, such as job loss or unexpected expenses, can impact the borrower’s ability to repay the mortgage.
If the borrower defaults on the loan, the guarantor becomes legally responsible for repaying part or all of the debt.
Guarantors should consider their long-term financial commitments and whether they can take on additional risk without jeopardizing their own financial security. You need to be in a strong financial position and have enough equity in your property to be a guarantor. It is always advisable to get independent legal or financial advice.
Other ways to support a First-Home Buyer
There are alternative ways to provide financial support for those who wish to assist a family member without becoming a guarantor.
One option is gifting money for a deposit, but this comes with its own considerations.
With gifted funds, if the resulting deposit is still less than 20 per cent of the property’s purchase price, then the banks will most likely want to see five per cent of genuine savings though some lenders will consider payment of rent (without arrears) as evidence of capacity.
Other options include buying a property with the family member, offering an interest-free loan (assuming there is borrowing capacity), or assisting with mortgage repayments on an informal basis.
Conclusion
A family guarantee can be a valuable tool for first-home buyers struggling to save for a deposit, but it is not a decision to be taken lightly. Both borrowers and guarantors must understand the financial commitments, risks, and alternatives before proceeding.
Important Information
Walbrook Wealth Management is a trading name of Barbacane Advisors Pty Ltd (ABN 32 626 694 139; AFSL No. 512465). Barbacane Advisors Pty Ltd is authorised to provide financial services and advice. Walbrook Wealth Management (Credit Representative Number 534783) is authorised under Australian Credit Licence 389328. We have based this communication on information from sources believed to be reliable at the time of its preparation. Despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice, and we are not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, we accept no liability for any loss or damage as a result of any reliance on this information.
