Legal Comment by Mark Illidge

October 2009

First-home buyers eager to take advantage of the First Home Owner Boost Scheme (in place until 31 December 2009) are increasingly seeking guarantees from family members. A family guarantee can help circumvent two major hurdles by:

• Overcoming the problem of not having a substantial deposit; and
• Avoiding, or at least substantially reducing, the amount of lenders mortgage insurance, which is payable when the loan to property valuation ratio is high (usually where the loan to value ratio is greater than 80%).

The three most common forms of family guarantees are:

1. Security Support - a common example of this is where parents offer their house as security for the amount their children need to borrow;
2. Service Support - the children may have the deposit but may be unsure about the affordability of the repayments on the debt. Here, the parents personally guarantee that the repayments are made but do not offer their house as security; or
3. Security and Service Support - in this case the child does not have a deposit nor the ability to meet the loan repayments. Here the parents offer income support as well as providing their house as security.

Whilst this is all good news for the buyer, the guarantor/s need to consider their position carefully. A guarantor may potentially be liable for the term of the loan (up to 30 years). This can reduce the guarantor's ability to borrow and/or sell their security property. The guarantor should look to ensure that they are released from their obligations as soon as possible. This may be achieved by having the purchased property re-valued after say five years of the term of the loan. Assuming the property has increased in value, the child may then have sufficient equity to have the guarantor/s released.

To find out more about the authors you can read About Us

For more information or to make an appointment please Contact Us