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Family guarantees popular in scramble for property

14/09/2009

Family guarantees are becoming increasingly popular as buyers scramble to get into the property market for the first time, ‘trade up’ or buy an investment property.

According to Smartline Personal Mortgage Advisers, family guarantees offer the means to ‘buy time’.

However, if using a family guarantee, Smartline Managing Director Chris Acret strongly advises borrowers to establish an exit strategy.

"In the face of tightening lending criteria, it makes sense to consider other lending options, like gamily guarantees, which offer borrowers a viable alternative,” Mr Acret said.

"However, the most important step in putting a family guarantee in place is to ensure there is an exit plan – a plan designed to release the guarantors (generally parents) from the loan to fund their child’s home as soon as possible."

"This is a relief for the guarantor, who doesn't want the burden of a 30-year loan on their property limiting their options, including the ability to sell their house.”

To exit a family guarantee, Mr Acret suggests having the child’s home revalued down the track to assess the property’s equity, which can be used to release the guarantors.

"Let’s say that your son or daughter purchases a home for $400,000,” Mr Acret explains.

"Generally, we would look at having the property revalued in about five years’ time and, assuming it increased in value to $500,000, your child could then get an 80 per cent loan for $400,000 and you as the parent can be released from the loan."

"In this example, the child now has enough equity in the property in their own right to not need the guarantee. And, as a result of the family guarantee, they have saved about $9000 in LMI (Lender’s Mortgage Insurance) on the initial purchase.”

Although commonly used by first home buyers, Mr Acret says a family guarantee is a useful tool for those looking to make the move up to their second or third home, or even for buying an investment property.

"In particular, if a client was looking at having to pay LMI, we would at least raise the idea with them because they could potentially save thousands of dollars,” he said.

"LMI can be a little confusing and the amount you pay will differ depending on the amount you borrow. Suffice to say, where people are borrowing up to 80 per cent of the LVR (Loan to Valuation Ratio, or value of the property), they don’t need to pay an LMI premium. However, once the LVR is more than 80 per cent, the LMI premium kicks in."

"We generally aim to limit the amount the guarantor has to guarantee, to make it more palatable for them. We’re generally not looking for the parents to fund the total amount of the child’s debt – generally just the lower amount required to bring the loan under the 80 per cent LVR."

"Importantly, family guarantees offer a solution for people in this and many other circumstances.”

Mr Acret says family guarantees offer borrowers three basic options:

Option 1:  Security support

This is where parents offer their house as security for the amount their children need to borrow. For example, if a child buys a home for $400,000 and borrows 80 per cent of the value ($320,000) from the bank, they need to borrow the $80,000 deposit and stamp duty of around $15,000 – that’s a total of $95,000. Consequently, a loan of $95,000 is then taken over the parents’ house.

Option 2:  Service support

In this situation, children have the deposit but cannot afford the repayments on the size of the debt, so the parents guarantee the repayments are made, but do not offer their house as security – just whatever is needed to ensure repayments are made.

From the lender’s perspective, the parents are just as liable for the debt. This option might be considered if your child was completing an apprenticeship, traineeship or other studies, knowing that in a year or two they will earn incomes that enable them to meet repayments on their own.

Option 3: Security and service support:

In this scenario children do not have enough deposit or equity and may also fall short on their ability to make repayments. In these circumstances the parents offer income support as well as security.

Mr Acret said using a family guarantee also means borrowers may avoid the issue of having to prove 5 per cent genuine savings, but urged caution.

"Lenders, and banks in particular, are becoming increasingly strict about seeing evidence of genuine savings,” he said.

"In using this approach – a family guarantee – children might also be able to put the First Home Owner Grant aside in an offset loan for a rainy day."

"There are many options available to borrowers when face with any property purchase decision. The advice and guidance of an experience adviser can be invaluable.”

As always, talk to your Smartline Personal Mortgage Adviser for more information.

 

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