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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 necessarily 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 obtain 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 with a smaller deposit, which could help you move into your dream home sooner. A Family Guarantee may also help avoid lender's mortgage insurance if your deposit doesn’t quite meet the threshold of 20% or above. 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 depending on the value of the security. 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. Guarantors are usually liable for payment of the debt in the event of default by the borrower, which is one factor that should be carefully considered prior to using a Family Guarantee to guarantee your loan.
There are also limitations of the Family Guarantee. While you can choose from a wide range of IMB loans, you cannot select an interest-only repayment schedule. Loans supported by a Family Guarantee can be 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 cover in order to get the process started. For example, 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.
In summary
Overall, a Family Guarantee could help you make your way into your first or next home. By increasing the value of security provided against the loan, you can potentially avoid 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. Remember, when dealing with loan agreements, seek appropriate legal advice before signing on the dotted line.
