Family guarantee loans, also known informally as “the bank of mum and dad”, brother or uncle for that matter, can be a way for first home buyers to get into the property market when they don’t have a 20% deposit.

A guarantor – usually a family member, agrees to back all or part of the deposit for the home buyer’s purchase supported by the equity in family members home or investment property.

This equity support gives lenders the comfort to lend over 80% of the purchase property without lenders mortgage insurance. According to Craig Betalli, Senior Broker with Our Broker. Moreover, you won’t pay a higher interest rate with a family guarantor loan, although there might be additional costs to cover the extra paperwork and legal advice.

For example, suppose a property is worth $600,000, and the first-time borrower only has a deposit of $30,000. In that case, the guarantor can provide a security guarantee to reflect a deposit of 20% and enable them to avoid paying LMI, which can add around $20,000 dollars to a home loan.

If a buyer doesn’t have any savings, with a limited liability guarantee, mum and dad can even help them borrow 100% of the property's value plus the purchase costs such as the stamp duty. What is more, the purchase doesn’t have to be a first home it can be their next home as well.

There are risks for guarantors but helping with the full deposit doesn’t mean mum and dad must cover the entirety of the bank’s loan as the guarantor’s liability is limited to the amount of the guarantee they provided.

If the borrower did fall behind on their loan, then the lender must notify the guarantors whether they are the parents or other family members. At this point, the family can come together to decide how to support the borrowers to meet their repayments or change tack to rent out the property or sell to limit their risk before the bank needs to take action.

 To find more about the benefits of a guarantor loan, contact your Our Broker today on 1800 913 677.