Family Pledge home loans

Family Pledge home loans allow a family member to ‘pledge’ an extra security (property or cash) to add to the property being purchased, so that the total loan required is under 80% of the combined value. Whenever a loan is above 80%, Lenders Mortgage Insurance (LMI) is needed to protect the bank in the even of s shortfall if the property  is foreclosed on due to non-payment., and this can be expensive and is dead money.

 

Family pledge home loan example:

Option A. Janet wants to buy a $500,000 unit and has $50,000 deposit (10%)* so she would have to pay up to $10,000 (compulsory in most cases) Lenders Mortgage Insurance. Janet has a $450,000 loan (90% of the total security value) plus pays $9,400^ insurance which she adds to the loan.

Option B. Janet’s mother agrees to pledge to the bank an additional $63,000 security against her own property or cash. The loan required for Janet to purchase is still $450,000, but the bank now holds the $500,000 property plus $63,000 extra security, so $563,000 in total. The $450,000 loan is now 80% of the value of the security, so no mortgage insurance is needed and the total loan is $450,000.

Options C. Janet’s mother pledges $75,000 security against her own property or cash. The loan required for Janet to purchase is still $450,000, but the bank now holds the $500,000 property plus $75,000 extra security, so $575,000 in total. The $450,000 loan is now 78% of the value of the security, so no mortgage insurance is needed and Janet could borrow the extra $10,000 (up to 80%) to use for renovations, furniture or pay down credit cards etc. The total loan is $460,000 but the extra money has gone to improvements of her property and life, instead of insurance.

Once Janet pays down some of the home loan and the property price rises to the point the loan is 80% of the value of her own property as a standalone, then Janet’s mother can be released from the pledge.

Important notes:

* This example assumes Janet also has money for the Stamp Duty, legals, transfers etc on top of the 10% deposit

^ LMI varies in cost from lender to lender and this example uses a median value.

Janet’s mother is used in this example but it can also be father, grandparents and with some lenders siblings or step-parents.

The person offering the pledge IS AT RISK OF LOSING THE MONEY PLEDGED if the applicant defaults on the loan, the property is sold by the lender and there is a shortfall on the sale value minus the loan balance owing and costs. If a security was offered you may have to pay back some cash, borrow yourself or if there were no other options, even sell the pledge property to pay back some or all of the Pledge amount. The maximum owing will be the Pledged amount.

In a few very specific terms, 85% loans are possible without insurance and sometimes even up to 90% for specific professions like doctors. Consult an experienced broker for information about qualifying for these products.

 

Watch this 90 second video on family pledge / family Guarantee loans for more information and examples.

Detailed Questions and Answers available at:   For the parents / Guarantor    For the purchaser