How to help your kids get into the market: Family Guarantees
Let us say you want to help your kids get into property. As a mortgage broker I often see parents giving gifts of $50,000 or $100,000 to their kids to help them buy their first place.
But what happens if you don’t want to or can’t give them a “gift” of money. Your kids no longer have to wait until they have saved up the required deposit: you can help them with a family guarantee.
A family guarantee allows the bank to use some of the equity in your property to help out as extra “security” for their loan.
It works because the bank will take a mortgage over kids property and also over your property meaning they have more “security” for the loan. Banks like it when they have more security.
This helps in 2 ways: lets the kids buy faster rather than waiting for years to save more and also it removes the need for them to pay mortgage insurance. Remember mortgage insurance is payable when the loan is more than 80% of the purchase price. Mortgage insurance rates vary, and can easily be $10,000, $15,000 even $20,000 in some cases.
These guarantees are not like the old style guarantees where Mum and Dad put their whole house on the line. These days the guarantee is limited to an amount eg 20% of the price of the value of the kids place AND the loan remains in the kids name – not yours.
Lets look at an example of them buying a $300,000 property.
Normally they would need to have saved up at least $15,000 deposit PLUS the stamp duty and legal costs. And if they can find a bank to lend 95% of the value, they would also be paying would pay about $8500 Mortgage Insurance.
Where a family guarantee can help.
It works like this – say your kid wants to purchase a property for $300,000. Say they have enough money saved to cover the stamp duty and legal costs. Obviously they need to borrow the full $300,000.
Let’s say you have a property worth $500,000 which you own outright. You can “lend” them equity of $60,000 which then acts as the deposit. The loan of the full $300,000 is in the kids name only and they don’t have to pay the mortgage insurance saving $8500. Your guarantee is for $60,000 only.
You will need to sign bank papers, provided information and your title to the bank and possibly get legal advice. Not all banks allow family guarantees, so best to see a good mortgage broker. Not every situation suits a family guarantee and beware family guarantee policies are very different at different banks, so again a good mortgage broker will work out which one suits your situation.
Can I still do this when I haven’t fully paid off my place?
This is possible provided both your loan and the kids new loan will need to be in a bank and the guarantee debt doesn’t plus your loan doesn’t exceed 80% of the value of your place.
How do you remove the family guarantee?
Once the kids place has gone up in value to $375,000 you can ask for the guarantee to be released as your property is no longer needed as security. This will take say 3 years on average.
What if my kid defaults on the loan?
If something goes wrong - the bank sells the kids place first before activating the guarantee. And even if this did happen your liability is limited to $60,000 NOT the full house. And the loan remains in the kids name even though it is “located” on you property.
I have more than one child, can I have more than one family guarantee?
Yes provided you have the equity in your place and provided everyone borrows at the same bank.