What is Family Pledge?
First Home Buyers with no deposit can use their mum and dad to assist. This option is known as Family Guarantee, Family Equity, Family Pledge or Parental Guarantee depending on the lender. It allows the first home buyer to maximise the amount they can borrow against their own security (the purchase property) by using a limited supported guarantee from a family member, without the requirement of loan mortgage insurance.
How does it work?
Mum and Dad have a fully paid property in which they live in. Kids can get the 20% of their purchase plus the cost of stamp duty and other costs and fees related to the purchase from the equity of their parents’ home. The other 80% will be secured by the property the Kids are purchasing. It is important that the Kids are able to service the full 100% of the loan. This scenario will save the First Home Buyer Kids the cost of Loan Mortgage Insurance which can amount to thousands.
Who are the acceptable guarantors?
Acceptable family members are defined as parents, siblings or sons and daughters.
Unacceptable guarantors include uncles and aunts, grandparents, non-resident family members, temporary residency visa holder family members or non-family members.
What are the risk for the guarantors?
A guarantor is liable for the amount specified in the Family Pledge guarantee. If the first home buyer does not pay the loan, the bank may look at the guarantor (who happens to be your family member) to pay the guaranteed portion of the loan. It is really important that the guarantor read and understand the full terms of the guarantee and seek independent legal advice before signing as guarantors.
What are the benefits of using a guarantor?
- You may be able to buy a home sooner as you may not need as big of a deposit
- You avoid paying loan mortgage insurance
- You can buy a bigger and more expensive property than what you originally planned
Should Dad and Mum be working?
Most lenders will require that parents are working or at least one of them is. It is also important that parents get financial advice before they decide to help their kids. This option is known as Family Guarantee, Family Equity, Family Pledge or Parental Guarantee depending on the lender.
Should Kids need to provide proof of 5% Genuine Savings?
The 5% Genuine Savings Policy no longer applies with the Family Pledge scenario.