Will the Family Guarantee Become the Way for First Home Buyers to Enter the Market?

As the world and very specifically Brisbane goes through a major housing crisis, there are a few sound bites that we hear over and over. One of them is that young people have no chance of affording to buy a home.

The housing market is undoubtedly out of reach of most 20-somethings; yet, a scheme called the Family Guarantee appears to be a very strong option for many young people. That’s quite a different scenario to the Bank of Mum and Dad which can be drawn on to afford a deposit and a mortgage, because the family guarantee, whilst it becomes a charge on the primary family residence, actually passes the responsibility for repayment to the first home buyer/young person.

Median house prices have appreciated so sharply in Brisbane over the last decade with many suburbs powering through the $1-million mark, and even in the outer environs of Greater Brisbane, medians are hitting $600,000 and more. This has given many families a windfall and a challenge at the same time.

The parents benefit from compounded growth that has been as high as 150% and rarely as low as 100%, whilst this rapid increase in prices penalises the opportunity for younger people. The Family Guarantee marries these two situations and enables the children to leverage the windfall of the last decade.

As the property market in Brisbane starts to benefit from the 2032 Olympics glow, the gap between young people’s financial means and the cost of entering the property market, will grow, and the Family guarantee will likely become a very attractive way for first-home buyers to enter the market.

HOW DOES IT WORK?

STEP 1: How much can the first home buyer borrow?
STEP 2: Valuation of the parent’s property – establish the equity available.

Example: The Parent’s Property is now worth $1.5m. They have $500,000 outstanding
on their mortgage. The Family Guarantee allows an 80% threshold of value
to help the guarantor, so in this case that is 80% of $1.5m, being $1.2m.

Now if the young person/first-home buyer was looking to buy a house for $800,000 and the bank needed a 20% deposit ($160,000), that deposit could be generated by a second mortgage being applied to the parent’s property. So the bank would take $160,000 security against the parent’s property until the $160,000 equity was established within the young person/first home buyer’s property. At that point, the bank would release the second mortgage on the parent’s property.

Affordability of the mortgage would be based on the income of the young person/first-home buyer, or of course twin incomes if it was a working couple. The mortgage could include all the house purchase costs like stamp duty.

Sibling Guarantees are also available in the same way, where a sibling has established good equity in their home, enabling their brother or sister to borrow against that.

Of course, the Family Guarantee and Sibling Guarantee thrive when the market is rising, equity in the first home buyer’s property at the current market trend would likely be covered within 3-5 years.

This podcast explains this in more detail, including where insurance is relevant:

You can see the past podcast episodes here.