Saving the initial 20% deposit on a home is not an easy task, but it can be done if you have the support of your family. Your parents can help you get a home loan in several ways and vice versa. A family-backed home loan is one such method that could help you buy a home.
How does a Family Deposit Mortgage work?
In a family deposit mortgage, a family member acts as a guarantor during the home loan application process. Having a guarantor could help increase your borrowing limit and help cover the lender’s risk in the event of default.
Typically, family members use the equity in their own home as collateral, although in some cases they may also use cash savings in a term deposit or similar. This means your guarantor doesn’t have to pay anything to help you increase your borrowing power, although the guarantor is obligated to pay the full amount of the loan in the event of default.
If you opt for a limited guarantee, your guarantor will only be required to pay part of the mortgage. You must first ensure that they have sufficient equity in their own home to cover the limited warranty.
When should you consider a home loan with a family guarantee?
Many borrowers consider family guaranteed home loans when they don’t have enough savings to pay the initial 20% deposit required to buy a home. A family home loan can save them the extra cost of lender’s mortgage insurance (LMI).
Who can be your guarantors?
Generally, it is the members of your immediate family who can vouch for your mortgage. This can include your parents, siblings, children, uncles, aunts and spouses. But some banks only accept your parents as guarantors for a family mortgage.
What are the different structures of a family mortgage?
A home loan with family guarantee can be structured in different ways:
Parents who are guardians of their adult child
This is by far the most common family mortgage structure. Often, parents will use the equity in their home to become guarantors for their children. This structure works like a standard guarantor home loan. However, in the event of non-payment, the parents will be required to reimburse the full amount. If the parents can’t find the money, they may have to sell their house to compensate the lenders.
Adult children as guarantors for their parents
As you age, banks may begin to restrict your borrowing power. Even the duration of your loan can be reduced if you are over 40 years old. Indeed, once retired, the risk borne by lenders increases considerably. Therefore, lenders reduce the term of the loan to ensure that your mortgage has been paid off by the time you reach your 60s.
If you buy a house after the age of 50, you must provide various documents and an exit strategy guaranteeing the repayment of the loan before your retirement. In this case, to facilitate the loan, you can ask your adult salaried children to become your guarantors.
Buy the property with your family
When your immediate family decides to buy an investment property, a lender may offer a family home loan where everyone is responsible for their share of repayment. In addition, lenders may offer the option of dividing the loan amount into several accounts to facilitate the management of their finances by the parties concerned.