Young people face a significant challenge in getting themselves on to the property ladder in Australia. A real chicken and an egg scenario at times. They need to live in a major city such as Melbourne or Sydney to progress their career and hold down a good job. But the cost of housing in these growing parts of Australia has spiraled out of their reach.
If you are a parent with children facing this kind of financial challenge, then it is likely you would love to help. However, in reality, few people can afford to present their children with a substantial cash gift to boost them up onto the first rung of the property ladder. But there is another way to help… family guarantees.
What is a Family Guarantee?
In its simplest form, a family guarantee uses the equity available in one family member’s home, as partial security on a mortgage for another family member. This has two major benefits. Firstly, it means that young people can buy their first home sooner, without needing to wait until they have saved a substantial deposit. Secondly, it can also lower the cost of mortgage payment protection insurance.
Does a Family Guarantee Carry a Risk?
The short answer is of course, yes. Using your own property to guarantee that another person will make loan repayments is always a risk. The long answer is yes, it is a risk, but a controllable one. Most banks and financial institutions will only accept a family guarantee of up to 20% of the loan value. Meaning you are only putting a portion of your home equity on the line.
Running the Numbers
Let us hypothetically say that your children want to buy a place in Sydney or Melbourne valued at around $600,000. They have saved for a while, and have enough cash on hand to pay the legal costs, and also the stamp duty. This means they would need a full mortgage of $600,000 to purchase their new home, which is quite frankly, unlikely to be granted by any lender.
Now, if you have equity in your property, say around the $500,000 mark, you could offer a family guarantee of $60,000 which could be used as the entire deposit. It would also lower the cost of their mortgage protection insurance.
When is the Family Guarantee Covered?
Once the value of the property your children have purchased has increased in value equal or more than the amount you pledged as a family guarantee, you can arrange for the guarantee to be removed. At this stage, your own property is no longer at risk, as you are no longer guaranteeing anything. In real terms, as long as property prices continue to climb in places across Australia like Sydney and Melbourne at similar rates to recent years, then this should have happened within three to five years. After this time, your kids are on their own, and you can be happy in the fact you gave them a nice starting boost.