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Family pledge or guarantee home loans
If a family member who owns a property can guarantee part of your loan, then you can buy a home faster with a family pledge loan.
A family pledge or family guarantee home loan is a way of getting a mortgage with support from a guarantor. This is usually a family member who owns a property and is willing to help you out.
Many lenders refer to these loans as family pledge loans. But in many cases you simply apply for an existing home loan and attach a guarantor to it. Family pledges or guarantee home loans aren't specific products themselves.
Buying a house with a family pledge makes it easier to get your loan approved because the guarantor offers your lender more security. But this is where it gets riskier too. Family and finance don't always mix. If you can't repay the loan, your family member might have to.
Home loans with a family guarantee feature
How does a family guarantee work?
A family pledge allows you to use the equity in your parents’ property or another family member’s property as security on a home loan. Guarantors are limited to immediate family members, including parents, grandparents and siblings.
The guarantor pledges to use their property to back your loan. If for whatever reason you can't repay the loan later, your lender may force your guarantor to pay all or part of your debt. This is what makes pledges risky.
While it was once standard practice to guarantee the entire loan and put your home on the line, today the security on the new home loan can be split and you can limit your guarantee. For example, the equity in your parents’ property may be used as security for 20% of the loan, while the property you are purchasing will be used as security for the other 80% of the loan. So if you’re helping your kids purchase a property for $500,000, your 20% guarantee is only $100,000.
What are the benefits of family pledges?
For the right type of borrower, a family pledge can be a life saver:
- Access finance. Most loans will have a minimum deposit that will have to be paid upfront in order to be accepted. This will usually be around 20% or as low as 5%. With a family guarantee you may be able to borrow more money and provide less of a deposit, which will allow you to buy a home sooner.
- Avoid LMI. Borrowing more than 80% LVR usually requires you to take out lender’s mortgage insurance (LMI), but a family guarantee means this extra expense can be avoided.
- Increase borrowing power. A family guarantee can boost your borrowing power. The family guarantee will often be used to cover a deposit that can't be paid so you will be able to borrow close to 100% of the loan in some cases if properly secured. Often, guarantor borrowers can borrow 100% of a property value plus costs.
- Eligible for FHOG. Taking out a family pledge home loan means you are still eligible for financial assistance through the First Home Owners Grant. In addition, it also means you will be eligible to access most mortgage products from a lender.
What are the drawbacks?
- Putting the family home at risk. If you’re the guarantor you could be putting your family home at risk, so consider all your options before choosing this approach.
- Not receiving expert advice. If you’re considering applying for a family guarantee home loan, it’s important that you seek out independent financial and legal advice first. You need to understand exactly what the guarantor will be liable for in the event that you default on the loan.
- Not all banks offer family guarantees. Family pledge home loans aren’t offered by all lenders, so the best thing to do is approach a mortgage broker for advice tailored to your needs.
Which lenders accept family pledges?
Many Australian lenders accept family pledges or guarantees on many of their home loans, usually on a case by case basis. All of Australia's Big Four banks have some kind of policy supporting family pledges.
Be sure to check that your lender does accept pledges and check any eligibility criteria before you submit a full application. You don't want to waste time and get rejected after applying.
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