Thanks to the family pledge loan, the road to homeownership doesn’t have to be an uphill climb for first-time buyers.
Saving enough capital for a house deposit can put the brakes on and prolong the process.
In 2018 Domain interviewed 52,000 people and concluded that 55% of first time home buyers received financial assistance from their parents at an average amount of $89,000.
By having a willing family member act as a guarantor and offer up their home equity in the security of your home loan, you can easily eliminate the need for any lender’s mortgage insurance costs.
What Is a Family Pledge Loan?
A family pledge loan allows a member of your family to guarantee your home loan using the equity in their home.
Essentially, your family member acts as the guarantor and puts up their property as security for your home loan. By doing this, the guarantor is pledging some of the equity on their property against your home loan.
Why Would You Use a Family Pledge Loan?
In Australia, a deposit of 20% is recommended to secure a property. If buyers can’t afford 20% upfront, they have to pay lenders mortgage insurance, which is added to the loan amount. To avoid paying lenders mortgage insurance, many people opt to wait until they have saved enough money to cover the 20% deposit before purchasing.
A quicker option would be to take out a family pledge loan.
A family pledge loan can cover up to 100% of the purchase price, plus costs like stamp duty and legal fees. The money you would have used as a deposit can be used for transaction fees and charges such as stamp duty and conveyancing fees.
How Does a Family Pledge Loan Work?
The equity of the property that the guarantor provides is used as security to back the loan and make up the deposit that you’re unable to pay.
If you want to buy a house with a purchase price of $500,000, the bank will likely finance you for $400,000 and require you to pay a 20% deposit of $100,000.
If you aren’t able to pay the deposit of $100,000, then the bank will want you to pay lenders mortgage insurance.
Suppose you have family members with a property valued at $1,000,000 with a loan of $500,000. In that case, they can offer the bank $100,000 from the equity of the property as security instead of requiring the borrower to pay lenders mortgage insurance since there is enough usable equity.
Who Can Be a Guarantor for a Family Pledge Loan?
The lending criteria for a person to be a guarantor indicates that the person should:
- be a close family member of the lender;
- be an Australian resident over the age of 18who is between the ages of 18-65;
- have substantial equity; and
- have a strong credit rating.
- Be employed (Dependent on bank)
Is It a Good Idea To Ask My Parents To Be Guarantors for My Family Pledge Loan?
Buying your first home is a massive step in the “adulting” direction.
Asking for your parents’ assistance might seem like taking a huge step back.
But, the reality is, if you can afford the mortgage repayments but can’t afford the cash deposit, asking for your parents’ guarantee can set you up for your future quicker than if you were to struggle alone.
It’s not uncommon for parents to want to support their kids and see them flourishing.
How Should I Structure My Family Pledge Loan Repayments?
The amount your family member pledges as security will depend on how much deposit you can pay.
If you can only afford a 5% deposit, your family can pledge security for 15% of the property value so that your loan-to-value ratio is 80%.
The minute the bank agrees to a home loan that’s more than 80% of the property’s value, they request LMI. So the idea is to have your family guarantee an amount to make it up to the 20% deposit.
This percentage should be paid off first to release the guarantor as soon as possible.
Most lenders offer a toggle function on their family pledge loans. A toggle function means you can switch between variable and fixed rates interchangeably.
It will be in everyone’s best interest if you can try and pay off the guarantee amount quickly so that the guarantors property can be released.
If You Are Thinking About Applying For a Family Pledge Home Loan, Consider These Things First:
- Most lenders don’t allow family pledge home loans to buy second homes or investment properties. They expect you to be financially stable enough on your own by then.
- While family pledge loans are generally not allowed for an investment property, you are permitted to move out after living on the property for 12 months.
- Most lenders in Australia won’t accept a family member as a guarantor if they are already retired.
- For the sake of the guarantor’s security, take out insurance on your life, total and permanent disability insurance, and consider income protection insurance.
How to release them as a guarantor?
- The borrower needs to pay down the loan to a level where the debt is 80% of the value of the property.
- House value increases substantially so the loan is 80% of the value of the property.
- Mixture of the borrower paying down the loan and the value of their property increases to a level where their loan is 80% of the value of the property – this would be ideal.
Always Seek the Advice of a Professional
Employing a financial advisor is always recommended when making significant decisions about your financial future.
Trained professionals can offer advice, guidance and strategies unique to your personal financial situation or needs.
It is also beneficial to seek independent legal advice.
If you are specifically considering a family pledge home loan, be sure to contact us to maximise your application success. We focus on helping each and every client understand the fundamentals of their home loan while employing the utmost care and attention to your personal needs.
If you can’t afford the cash deposit of your home loan, it is worth asking your parents to be your guarantors.
This way, you can lower your fees and charges, as well as your lender’s mortgage insurance.
Family pledge loans offer a toggle structure where you can alternate between variable and fixed rates, meaning you can make additional payments and pay off your guarantee quicker.
If you dishonour payments, your lender will look to your property before your parents’ when repossessing to consolidate debt.
Always seek independent legal advice, as well as chat with a mortgage broker before making any hasty decisions about your financial future.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.