Sometimes, banks may be able to take a mortgage over a home owned by family members as extra security for another family member’s home loan.
Doing this helps reduce the Loan to Value Ratio, or LVR, which is the amount of the loan as a percentage of the security available to a bank. A lower LVR means the deposit to buy a property may not need to be quite as big.
Where this happens, banks will generally need a guarantee from the family members giving the mortgage, which means they agree to be responsible for repaying some or all of the home loan if needed. A person giving a guarantee is called a guarantor.
The guarantor’s security doesn’t need to cover the entire loan either, just a portion of it. Generally, it’s the amount needed to reduce the LVR to 80%, which helps the family member hit their deposit goal sooner. The guarantee can often be limited to the extra security needed to get to 80% LVR.
Added bonus – it also means a low equity premium or margin won’t apply, because they won’t be borrowing more than 80% of the value of the property.