Do your parents want to help you buy a home or invest in property?
Many lenders these days offer limited equity guarantee or family pledge loan structures to help you purchase a home without the absolute necessity of a cash deposit. Furthermore a family pledge structure will usually eliminate the need to pay expensive once off lenders mortgage insurance (LMI) costs.
How family pledge works?
Your family members (usually parents) can use their own home’s equity to provide additional security for a portion of your loan amount. This solution reduces your loan to value ratio and can also save you a significant amount of money by reducing or even avoiding the need to pay Lender’s Mortgage Insurance. So you get into your home faster, with help from your family.
With most lenders the guarantee can be limited to a specific amount (so not guaranteeing your full loan) which helps provide certainty and allows the property to be released much earlier than guarantees which cover 100% of the loan amount.
- By increasing your security through a guarantee from your family, you may be able to reduce or avoid paying Lender’s Mortgage Insurance. Lender’s Mortgage Insurance is generally payable on loans that exceed 80% of the value of the property.
- A Family Pledge can help you maximise the amount you can borrow so you can purchase the property you want. A guarantor can request to limit the guarantee to a specific amount
- Both the borrower or guarantor can ask us to release the guarantee at any time once standard Loan to Value ratio (LVR) requirements are achieved (usually 80%)
- Interest rates and packages are the same for almost all Family Pledge loans. Standard guarantee and legal fees from most banks will normally apply.
- The guarantor can be a new or existing customer of the bank we recommend. The guarantor can even retain their home loan with their current Home Loan provider providing sufficient equity exists.
Take this example
Say you were planning to purchase a $500,000 property with a $25,000 deposit (ignoring closing costs for simplicity you would have a Loan to Valuation LVR of 95%), this would mean Lenders Mortgage Insurance (LMI) would most certainly be payable.
If your parents had a residential property and agreed to provide a family pledge guarantee of $75,000 as an additional security, your LVR would be reduced to 80% (this guarantee is not a cash loan but the lender does register their interest by way of a mortgage for the guarantee amount only against the guarantors property).
This would result in the LMI premium requirement being waived, up to a $17,760 saving for you (eg. 3.4% of the required 95% loan amount plus Victorian stamp duty of 10% using indicative QBE LMI rates as of Jan 2015)!
While this example uses a deposit some lenders do not require this and can approve a loan to valuation ratio up to 100% PLUS costs (stamp duty etc). This may result in an approval of up to 106% if required – we of course recommend a deposit is always preferable though.
Are you eligible for Family Pledge guarantee?
- You can use a Family Pledge to buy a home or invest in residential property, and you don’t have to be a first home buyer to be eligible!
- Family members who can provide the Family Pledge guarantee include parents, grandparents, siblings, sons and daughters.
- Family Pledge is generally not available for existing loans or refinances. Increases to loans with Family Pledge are allowed but the Family Pledge amount may not be increased usually.
- Individual applicants are restricted to a maximum of one parental guarantee/family pledge borrowing.
- As a rule of thumb no single guarantee is to represent more than 50% of the guarantor’s security. Some banks do not allow guarantees to be against a parents owner occupied home but only investments while other do not.
- Guarantors are usually required to secure independent financial and legal advice as a condition of loan approval.
- Family pledge loans can guarantee security only and NOT income (you must be able to earn sufficient income to service the entire loan based on your own resources).