The property market is at an all time high with many capital city home prices way over $1 million today. Many of our clients are asking us about how they can help their children get into the property market and have heard about a Family Guarantee (also called Parental Guarantee).
What is a Family Guarantee?
You want to help your kids but don’t have $50,000 to ‘gift’ them. Your kids no longer have to wait until they have saved up the required deposit: you can help them with a family guarantee.
How does it work?
It works because the bank will take a mortgage over kids property and also over your property meaning they have more “security” for the loan. Obviously the banks like the extra security.
This helps in 2 ways: lets the kids get into a home faster rather than waiting for years to save more and also it removes the need for them to pay mortgage insurance. Remember mortgage insurance is payable when the loan is more than 80% of the purchase price. Mortgage insurance rates vary, and can easily be $10,000, $15,000 even $20,000 in some cases.
These guarantees are not like the old style guarantees where Mum and Dad put their whole house on the line. These days the guarantee is limited to an amount eg; 20% of the price of the value of the kids place AND the loan remains in the kids name – not yours.
You will need to sign bank papers, provided information and your title to the bank and possibly get legal advice. Not all banks allow family guarantees, so best to see a financial adviser or an accredited mortgage broker. Not every situation suits a family guarantee and beware family guarantee policies are very different at different banks, so again a good mortgage broker will work out which one suits your situation.
How do you remove the family guarantee?
Once the kids have reduced the loan amount secured by the guarantee you can ask for the guarantee to be released. On average this can take approximately 3 years on average.
What if my kid defaults on the loan?
If something goes wrong – the bank sells the kids place first before activating the guarantee. And even if this did happen your liability is limited to the guarantee NOT the full house.
Am I eligible?
The family guarantee is available for those buying their first property, normally as an owner-occupier or as an investor.
The family guarantee is provided by either parents or legal guarantee. A single guarantee can only represent no more than 50% of the guarantor’s security.
For more information about the family guarantee, come and talk to us today.
General Advice Warning
This blog contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
If you decide to purchase or vary a financial product, your financial adviser, Charter Financial Planning Ltd and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.