Family equity loans
Using the equity in a family member’s existing property can assist you to purchase property sooner than you might otherwise have been able to. Called family equity, family pledge or, more generically, a limited guarantor loan, it allows a family member – usually your parents – to guarantee a portion of your home loan.
Family equity is generally a feature applied to a residential home loan. All the same terms and conditions as would normally apply to the loan type you have selected will still apply. This type of home loan may be a good option for a first home buyer or someone returning to the property market.
Talk to a loan market mortgage broker about how family equity may help
To talk to a mortgage broker about how family equity may help you to purchase a property, or how you can assist a family member into the property market, talk to a Loan Market mortgage broker or call us on 13 LOAN (+61 2 0249 3739).
Types of family equity available
There are two main types of family equity you may be able to access: a limited liability guarantor option, or an income guarantor option. In both cases, it is important to obtain legal advice before signing an agreement. Some lenders will provide a document called a Draft Forms of Agreement, which can form the basis of the final agreement you, your family members and your legal adviser sign.
Family equity – limited liability guarantor
With the limited liability guarantor option, your family member agrees to offer their existing property as security for a portion of your home loan, usually around 20 per cent. The property you intend to purchase acts as security for the remaining 80 per cent. What this means is that in effect, you borrow money for your purchase via two different loan facilities. Because neither of the home loans used exceeds 80 per cent of the value of the property, you do not need to cover Lenders Mortgage Insurance.
Once a certain level of equity has been achieved, usually 10 – 20 per cent of the value of the property, you can take the entire loan amount over in your name and remove the additional equity guarantee.
In some cases, by using the family equity option you may be able to borrow more than the value of the property, which can help you to cover additional costs and/or consolidate debt if required.
If you would normally be eligible for the First Home Owners Grant, you should still be able to access this using a family equity option.
In the event of a default on the loan, the family member who is guarantor is only liable for the portion secured by their property, e.g. 20 per cent.
Family equity – income guarantor
Although rarer, a second option is to have a family member guarantee your home loan repayments for a period of time. This can be particularly useful if you are planning time off work to have children or return to study and will have a reduced income during this time.
It’s important to note that if you do default on your home loan repayments during this time, the family member who is guaranteeing your loan will be liable for the full repayment amount.
Talk to a loan market mortgage broker about family equity options
To find out more about how family equity works and how it can help you own your own home, or to discuss the home loan that is in your best interest, talk to your local Loan Market mortgage broker, or call us at any time on 13 LOAN or direct on +61 2 9249 3739.
