HOW CAN YOUR FAMILY HELP WITH YOUR HOME LOAN DEPOSIT?

Written by: Maria Papa

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?

  1. You may be able to buy a home sooner as you may not need as big of a deposit
  2. You avoid paying loan mortgage insurance
  3. 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.

"Note that the guarantee can't be released until the guaranteed amount is paid off and the loan is reduced."

Family Pledge Scenario 1

Amy & John wish to purchase a block of land for $350,000 and build for $300,000. Their parents’ property is worth $700,000 with NIL debt attached to it. Both parents are working and are happy to use the equity of their home to provide the 20% deposit and other associated costs to purchase to help their children buy their first home. A mortgage broker has assessed Amy & John’s income, liabilities and expenses and the assessment shows that they can afford the full loan of $650,000.

All of the major lenders, CBA, NAB, Westpac and ANZ will consider this scenario. Our job as your mortgage broker is to structure the loan in such a way that the loan secured by the parents’ security is paid as quickly as possible. It is also possible that once the property of the First Home Buyer Kids increase in value, the equity is released to pay out the loan secured by parents’ property.

Family Pledge Scenario 2

Diego is planning to purchase a $500,000 property with a $25,000 deposit (LVR of 95%) which means loan mortgage insurance would be payable. If Diego’s parents have a freehold house and agree to provide a family pledge guarantee of $100,000 as an additional security, the LVR would reduce down to 80%. This will result in the LMI premium requirement being waived, saving Diego thousands in LMI premium.

Originally published January 28, 2019 8:00:00 AM, updated 07 March 2019

Here’s a copy of The Complete Guide to First Home Buyers Manual for you to review

Your full financial situation will need to be reviewed prior to acceptance of any offer or product.

 

MBM Mortgage Pty Ltd trading as Maverick Finance | ABN 28 149 301 084 | Credit Representative  403019 is authorised under Credit License 389328

This website provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.