The Pros & Cons Of Family Guarantee Loans - Pearl Financial

The Pros & Cons Of Family Guarantee Loans

By Shane | First Home Buyer

Feb 27

Home ownership may be more difficult to attain as compared to previous generations. Many Australians are putting off buying their first home until later in life. With the overall homeownership rates across the nation have been dropping since the mid 90’s, it seems like an uninviting scenario. But still, don’t get discouraged for there are still solutions available and it isn’t just a matter of saving more or for longer to have a larger home deposit.

Times may have changed, opening up new possibilities for those who find it difficult to work their way onto the challenges of breaking into the property ladder. There’s a family guarantee loan wherein a family member, who can be a parent, spouse or any immediate family member, can help support you with your home loan application as a guarantor. Just like all lending products and services, it’s best for you to get a full understanding of how guarantor loans work before you commit. Keep reading to see if a family guarantee loan can be right for you.

Pros

One of the most essential benefits of a family guarantee loan is that it may allow borrowers to purchase a home without the need to save for a large home deposit. It can help you move into your dream home sooner rather than having to save for years. A family guarantee loan can also help you with the mitigation of Lenders Mortgage Insurance (LMI) if your deposit doesn’t meet the 20% or above threshold.

LMI is an additional cost which acts as a risk protection for lenders and can be waived for a family guarantee loan depending on the value of the additional security provided by the guarantor. Borrowers may also be able to access lower interest rates due to the value of the security provided by the guarantor. With that, you, as a borrower, maybe open up with a wider range of loan products.

Cons

If there are advantages, consider that there are also disadvantages. A borrower who defaults on the loan or isn’t able to comply with other obligations that are part of the loan agreement can create a deficit that may not be eliminated by the sale of the borrower’s home. It would be the responsibility of the guarantor to make up the difference if that’s the case.

Family guarantee loans also have limitations. Even though you get to choose from a wide range of loans, the downside is that you may not be able to apply an interest-only repayment schedule for some lenders enforces principal-and-interest only.

Lastly, there would still be some purchasing costs. Even though you were able to avoid the full 20% deposit requirement, the borrower may still need to contribute in order to get the process started.

Overall, you can make your way into purchasing your first or next home with the help of a family guarantee. It increases the value of security provided against the loan and mitigates LMI, which is one of the difficulties faced by first home buyers if your deposit wasn’t able to meet the requirement. For more details on family guarantee loans, you can contact us to help you seek professional advice.

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About the Author

Shane specialises in helping Gen Y professionals and business owners make an impact by accumulating more assets, generating more income, and having more time to enjoy life. He has a Master of Applied Finance, an MBA, and a Master of Financial Planning. He is also a terrible golfer.

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