The family pledge loan may be suitable if you have little or no deposit, but have strong income to service a loan and a supportive family member to help ‘pledge’ some extra security to satisfy the lenders deposit criteria. Apart from getting you into the market sooner without having to save for a full deposit, it may also save you thousands in expensive mortgage insurance.
As the name suggests, a family pledge (family guarantee or family support loan as they are often called), allows a parent or in some cases other family member, to offer a property they own (with or without a mortgage), as a second security for the bank. This second security acts like the deposit to reduce the banks sole risk with you as the lender, to 80% of the value of the property being purchased. The additional 20% plus Stamp Duty and transfer costs is supplied by a combination of your cash, plus the security guarantee from the parents.
Family pledge example:
In the above example we assumed a $50,000 deposit, but with a family pledge you have even less deposit, in fact no deposit is accepted in special situations allowing you to borrow 100% of the purchase price plus stamp duty and legal costs. With property prices rising, you’re able to buy earlier and benefit from the capital gain, rather than having to wait and save a sizeable deposit as the property prices rise and you need to pay an ever increasing deposit amount.
An important point is that the family member offering the pledge is at risk for the amount they pledge ($70,000 in the above example) and the bank will pursue them for it if the loan defaults, the property has to be sold and there is a shortfall on the funds to pay back all loans after settlement. If the person offering the pledge/ guarantee did not pay then they would have to borrow and if they couldn’t do this or refused to pay, the bank may exert their right to sell the guarantors property to get their shortfall back. This is probably the worst case scenario but there is a real risk and the guarantor/ pledge participant needs to be aware of this.
On a brighter note, as the property price increases and you pay down the loan somewhat, once the LVR is down to 80%, you can then apply to the bank and have the guarantor security be released.
Security release example:
Only a handful of lenders do family pledge loans and many use terms like family guarantor loans or family guarantee. Some want the parents to guarantee the full loan (as in the above example $470,000), whilst others will limit the guarantee to just the $70,000 portion. A few accept second mortgages on the parents property being pledged, however others don’t.
It’s always worth talking to an experienced mortgage broker to research your options to find the best for your circumstances. Email or call us now.