Family Guarantor Loans: A Smart Way to Save on Homeownership Costs
If you’re looking to buy a house or land, but don’t have substantial savings for a large down payment, a family guarantor loan could be a worthwhile option to explore. These loans offer a way to avoid the often expensive Lenders Mortgage Insurance (LMI) while getting you into your dream home sooner.
How Do Family Guarantor Loans Work?
With a family guarantor loan, a close family member – usually a parent – uses the equity in their own property as additional security for your home loan. This extra security helps bring down your loan-to-value ratio (LVR) often enough to eliminate the need for LMI.
Example: Saving Thousands with a Family Guarantee
Let’s say you’re buying a $500,000 home and don’t have any savings for a down payment. Lenders typically want an LVR of 80% or less to avoid LMI. That means you’d need a $100,000 down payment on your own. Ouch!
Here’s where a family guarantor loan helps:
- Your parents offer to use some of the equity in their own home as additional security for your loan.
- Many lenders offer limited guarantees. This means if you were to default, your guarantors would only be liable for the guaranteed portion (let’s say $100,000 in this example).
- Once your loan balance drops below 80% of the property value, you can often have the guarantee on your parents’ property removed.
Benefits of Family Guarantor Loans
- Save on LMI: LMI can be expensive, often thousands of dollars. A guarantor loan may help you avoid this cost.
- Get into your home sooner: No need to wait years to scrape together a hefty down payment.
- Potentially lower interest rates: Some lenders may offer better interest rates with a family guarantee due to the reduced risk.
Things to Consider
- Risk for guarantors: Your guarantors must understand the risks involved and seek independent legal and financial advice. While limited guarantees are common, in the worst-case scenario, your guarantors’ property could be at risk if you default on the loan.
- Eligibility: You must meet the lender’s standard borrowing criteria, and your guarantor must typically be an immediate family member.
Is a Family Guarantor Loan Right for You?
If you’re a first-time buyer or have limited savings, a family guarantor loan could be the key to unlocking the door to homeownership. Discuss this option with a trusted mortgage broker or lender who can help assess your situation and explain if this type of loan might be the right fit for you.
Let the team at You First Finance help navigate your options for the best home loan solution!
