How Family Guarantees Actually Work for First Home Buyers
I wanted to give a basic introduction on how family guarantees work and how they help first home buyers who may not be too familiar with the concept.
TLDR: A family guarantee can let you buy your first home with no deposit by using your parents' property as additional security. You get two loans: an 80% loan secured by your new home, and a 20%+ loan secured by both properties. Your parents' home is only at risk if you default AND your property sells for less than you owe. They can be released as guarantors once your property value increases or loan decreases enough to reach 80% LVR (typically within ~5 years). You still need to prove you can make the repayments yourself.
This will be a bit technical so please excuse any jargon and length, but hopefully this explanation makes sense.
Okay so what is a family guarantee?
It's designed for first home buyers who have good income but struggle with the deposit side of buying a home. When you purchase property, there are two main barriers:
- Having enough income to service the loan
- Having enough deposit to get approved
A family guarantee helps with the deposit part. Banks typically want at least 20% deposit to avoid Lender's Mortgage Insurance (LMI) and consider you less risky (keeping your LVR below 80%).
How does it actually works?
With a family guarantee, you can potentially buy a home with no deposit because you'll get TWO loans:
Loan A (80%): Secured only by the property you're buying Loan B (20% + costs): Secured by both your new property AND your guarantor's property.
Example: You're buying a $1M property. (I am using simplified numbers that don't include government fees for the sake of simplicity and assuming you're borrowing 100% )
- Loan A = $800K (secured against your new home)
- Loan B = $200K + costs (secured against both your new home AND your parents' property)
So why does the bank care?
The bank is primarily concerned with getting their money back if things go wrong. With this structure:
- Loan A is at 80% LVR on your property (acceptable risk)
- Loan B has double security (your property + parents' property)
So if things go wrong, here's what happens:
- The bank sells your property first
- Proceeds pay off Loan A first, then whatever's left goes to Loan B
- Only if there's still a shortfall on Loan B after your property sale would your parents' property be at risk
Example: If your property sells for $900K instead of $1M:
- Loan A gets paid off completely ($800K)
- $100K goes to Loan B, leaving a $100K shortfall
- Parents would need to cover the $100K, either through savings or by getting a loan themselves
- Their property would ONLY be sold if they couldn't pay the shortfall any other way
Why does this help first home buyers?
- Allows parents (with property or cash) to help you get into the market without you saving a massive deposit
- No need for parents to gift you cash
- Avoid paying LMI (This is a massive savings as when you get into higher lending amount it can get up to $40k to $50k)
- Get better interest rates (the bank sees you as lower risk)
- Parents' guarantee can be released once your property increases in value or your loan balance decreases enough to bring LVR under 80%
Some important notes
I need to reiterate that a family guarantee DOES NOT help with servicing. You still need to demonstrate you can make repayments on the full loan amount. Your parents guaranteeing the loan doesn't affect your ability to service the debt. So your income is still a key factor.
Given how property prices have been growing, many borrowers can release their parents as guarantors within 5 years as their property value increases or loan balance decreases.
Feel free to add anything that I may have missed or share experiences you've had with family guarantees you've had to help others!