Typically, a property buyer needs to contribute a 20% deposit and transaction costs of upto 5%. The lender would then lend 80% of the purchase price. Some lenders will lend upto 95% of the purchase price but charge a Lenders Mortgage Insurance (LMI) premium for loans greater than 80%. This premium can be upto 4% of the loan amount, and therefore be in the many thousands of dollars. This type of insurance protects the lender and not the borrower if the security property is forced to be sold below loan balance value. It makes sense for the borrower to avoid this LMI premium if at all possible.

A family guarantee is a credit policy by some lenders that allows close family members to provide additional security for a loan. A typical scenario would be when a person wants to buy a property but does not have deposit funds. The lender is able to take the proposed property being purchased as well as property offered by the parents which is unencumbered (no mortgage). The lender then has more security than 100% of the funds required for the proposed purchase. The buyer is able to fund the property purchase without any personal deposit contribution. This strategy makes sense for parents to assist their children to enter the property market sooner without them having to save the cash deposit or pay the LMI premium. 

The borrower/s still need to be able to demonstrate loan affordability without assistance from the guarantors. The lender will require the guarantors to get independent legal advice with respect to the guarantee to ensure they understand the personal risks of this transaction. That is, if the borrower fails to make repayments, and the primary security property is sold to repay the loan, any shortfall will become a liability of the guarantors. The guarantor would need a high level of confidence that the borrower can afford repayments, or that the property value will be sufficiently greater than loan balance in a worst case scenario so that family guarantee security is never required. Additionally, the guarantor is always at liberty to assist the borrower with loan repayments if there is some unexpected short-term income difficulty.

If you are considering how equity in family assets can be accessed to enable buying property by family members, we are able to assist with assessing the risks and benefits for both the borrowers and guarantors.