The pros and cons of Family Guarantee loans
For many young Australians, home ownership may be harder to attain compared to previous generations. Many Australians are putting off buying their first home until later in life, while the overall home ownership rates across the nation have been dropping since the mid-1990's1. It seems like a grim scenario, but there are still solutions available - and it isn't just a matter of saving more or for longer for a larger deposit.
What is a family guarantee?
With IMB Bank home loans a Family Guarantee could help you enter the market. It can allow your family to help you purchase a property by acting as guarantors, making it possible to get into your home sooner without having to spend further years saving for a deposit. By offering either their own home or a term deposit held by IMB Bank as security, family members can help borrowers avoid lender's mortgage insurance and enable a lower interest rate.
However, just like all lending products, it is best to know the full picture before you commit. Read on to see if a Family Guarantee could be right for you.
What are some potential advantages? |
Perhaps one of the most significant benefits of a Family Guarantee is that it may allow borrowers to purchase a home without needing to save for as large a deposit. Rather than having to save for years, you could move into your dream home sooner. A Family Guarantee may also help with the mitigation of lender's mortgage insurance if your deposit doesn’t quite meet the 20% or above threshold. This additional cost, which acts as risk protection for lenders, can be reduced or waived for a Family Guarantee depending on the value of the security put down by family members. Lastly, borrowers may also be able to access lower interest rates due to the value of the security put down. The lower overall loan-value ratio may open up a wider range of loan products to you. |
What are some potential disadvantages? |
However, that isn't to say that the Family Guarantee is without negatives. If a borrower defaults on the loan or doesn't comply with other obligations that are part and parcel of the loan, it can create a shortfall that may not be eliminated by the sale of the borrower's home. In this case, it would be the duty of the guarantor to make up the difference.
There are also limitations of the Family Guarantee. While you can choose from a wide range of IMB loans, you cannot utilise an interest-only repayment schedule. It is principal-and-interest only.
Finally, while you can avoid the full 20% deposit requirement, there are still some purchasing costs that the borrower may need to contribute in order to get the process started. You will still need to fund the deposit required by the contract for the sale of land, which is usually 10%. It is important to keep this in mind when planning your property purchase.
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In summary
Overall, a Family Guarantee could help make your way into your first or next home. By increasing the value of security provided against the loan, the requirement to save enough money to eliminate the additional cost of Lender’s Mortgage Insurance, a significant difficulty faced by first home buyers today2.
For more information on Family Guarantee options, get in touch with the team here at IMB Bank; and remember, when dealing with loan agreements, seek appropriate legal advice before signing on the dotted line.
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Source:
1 - Australian Institute of Health and Welfare, Australia's welfare 2015
2 - First Home Buyers Australia, 2016 National First Home Buyer Report
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