How to use Family Equity for a home loan deposit

Building up equity in your home can set you up for more financial freedom in the future. However to get to the point where you have equity in your home you need to first secure a home loan and coming up with enough of a deposit can be difficult. However if you are lucky enough to have parents or close family members who have equity in their homes already, they may be able to help you secure your loan will provide your deposit amount using a family equity guarantee option.

What Is Family Equity?

Choosing to use the equity in the home of a close family member can make it possible to get into your home sooner and more easily. However before you choose to go down the family equity path you need to find out more about how it works. Family equity can help you secure a home loan:

• A family member uses the equity in their home to guarantee your deposit. If you don’t have enough of a deposit to apply for your home loan, a family member can use the equity in their home to guarantee your loan so you don’t need a deposit. It can be hard to apply for a 100% loan but if you have a family member who acts as guarantor for 20% of your property value for example, the property you are purchasing acts as security for the other 80%. This means there are now two loan facilities but neither of those are greater than 80% so you can also avoid paying lenders mortgage insurance. In this way the family member who has used the equity in their home as security for your home is only liable for the portion of your loan which was guaranteed by their property, not for the full loan amount.
• A family member accesses the equity in their home and gives it to you. If your family member has built equity in their home they should be easily able to access that by refinancing, redrawing or taking out a second mortgage. Family equity then acts as a gift to you which you then put towards your home loan.

How To Know Family Equity Will Benefit You

Taking advantage of family equity guarantee options can make it much easier for you to navigate the home loan application process, but you need to make sure you understand exactly how family equity works because you don’t want to be applying for a loan you can’t afford, and you don’t want a family member to become responsible for the loan when you can’t meet the repayments. To avoid creating rifts in your family over money and loan amounts:

• Be very sure that you can afford to service your loan. If you need help reaching your deposit, are you going to be able to make the repayments on your own? While your family can act as an income guarantor to cover a portion of your repayments if you can’t meet the full amount, if you are going to this extent of utilising family equity to secure a home loan, can you really afford the loan in the first place?
• Family equity home loans may suit you if you have your cash tied up. If you have other investments, such as shares or investment properties, you may not have access to those funds when it comes time to put a deposit on your home loan. Rather than applying for a deposit bond you may choose a family equity option so you can maintain your investments while also securing a new home.
• Choose a specialised family equity loan. This can make the paperwork, transfers and the repayments easier to manage and easier to keep separate if both you and your family member need to cover repayments.
• Have a family equity guarantee agreement in place. This agreement will cover details about how you plan to repay your family member who has lent you the equity in their home so you can secure yours. This is not a standard part of a home loan application and you may need to work with your mortgage broker or financial adviser to put this paperwork in place.

If your parents for example are willing or are in a position to help you get into your home more easily than a family equity home loan may be the right option for your family. Find out more and start comparing the best home loans which can allow you to take advantage of equity in the family home.