Family Guarantee or 5% Deposit Scheme?

Variously known as a ‘parent guarantee’, ‘family guarantee’, ‘family pledge’ and other similar names, depending on the lender.

If you are fortunate enough to have:

• a parent

• a sibling

• grandparents

• a son or daughter (not relevant in this particular case but thats an option).

• (I will also add sometimes an aunt or uncle under a policy exception)

who is willing to use their property as security, we recommend considering this before utilising the 5% government deposit scheme.

Why?

As there is more security, the interest rate is generally lower.

There are less restrictions around renting the property out and the use of the property.

In some cases, you can borrow up to 107% of the value of the property being purchased, to cover stamp duty and legals.

Lets use an example

Lets look at Clancy. Clancy is looking at purchasing his first home for $800,000.

He has saved $50,000.

Clancy has a family member who is willing to lodge their home as security collateral. That home is worth $2m.

Using both homes as collateral, and assuming a loan of $750,000 (ignoring legal costs and assuming you receive a first home buyer stamp duty exemption) , the Loan to Value Ratio (LVR) is $750,000 / ($800,000 + $2,000,000) = 27%.

When banks price loans, they price for different LVRs - less than 70%, 70-80%, 80-90% for example. The higher the LVR, the higher the interest rate. Thus Clancy’s home loan will be priced at the lowest LVR and thus relatively cheaper than if you used the 5% scheme (which is priced at an 80% LVR).

Policies differ slight between banks , but the family member wont be guaranteeing the full loan amount, only the difference between the deposit amount and 20% equity, which in this case is in this case $110,000. For some banks the guarantor can nominate a specific amount they are willing to guarantee, limiting risk.

In some cases, under the parent guarantee, you are able to rent out your property (after 12 months with a NSW first home buyer grant), or even buy it as an investment property up front (although in this scenario you wont be able to make use of other first home buyer grants). Under the 5% Australian government guarantee, you are unable to rent your property out until you get to 20% equity. If you do rent it out whilst still in the scheme, you risk having to pay significant penalties.

So in summary, using a parent guarantee can offer a lower interest rate cost, more flexibility and you can borrow up to 107% of the property value (and thus saves waiting another year to save the deposit).

Note we always tell our clients using this scenario that its our aim for them to get to that 20% equity as soon as possible (via paying off principle and property price growth). To quote “I want you to smash that mortgage in the first few years”.

FAQ

What if my parent already has a mortgage?

Yes, it can still be possible.

Does my family member get to see my financials?

Yes, they get copies of everything until you are at 20% equity and have them removed as guarantor.

Does the family member need to have their income considered?

No, as a security guarantee only, this does not factor in for many cases (not all). Great for parents no longer working.

Can my family member lose their house?

In theory yes, however in practicality, banks will negotiate and this would be a highly unlikely scenario, with many other options open to both parties first. Talk to me more about this, happy to explain in a lot more detail.

If you aren’t in the extremely fortunate position of having a family member help you in this amazing way, or you prefer to go it alone, then by all means we will help you with the 5% Australian Government Home Deposit scheme, we just wanted to point out the pros and cons if this situation is available to you.

Got a parent or child who you want to show this to? Simply forward this email. We are happy to discuss on Zoom with all parties present.

Want to chat about it? Call or text me 0403 397 060 or book in directly: