Getting the keys to your first home isn't a walk in the park, but how much closer would you be if you had a little help from your folks?
In Sydney, the median property price still sits above $1 million. That means for a borrower to avoid paying lenders’ mortgage insurance, they’d need a deposit of $200,000. That’s no easy feat. As Greater Bank’s Home Loan Deposit Calculator will show you, even a $300,000 purchase can require home buyers to save $60,000 deposit at 20%.
However, there is another alternative. Family pledge loans allow a relative to secure your loan by using the equity in their home. Usually the family member acts as a guarantor for a proportion of the loan. When you’ve built up your own equity, you can remove your family member’s liability and take on full responsibility for the loan yourself.
As the market continues to grow, family pledge loans – also known as guarantor loans – are likely to become more popular, especially for parents who want to help their kids get a start in the property market.
The below case study may help explain why.
Jessica is looking to buy her first property – a unit in Sydney, valued at $600,000. In order to avoid lenders’ mortgage insurance, she would need a deposit of $120,000. However, currently she’s only saved $30,000. Her parents, Rod and Marie, have a house valued at $1.5 million dollars, which they have paid off fully. They offer to help Jessica make up the 15 per cent shortfall in her deposit by using some of the equity in their home. The benefit for Rod and Marie is they get to help their daughter into the market and for Jessica, she does not have to wait another few years to save another $90,000 for the deposit.
While it sounds like a win-win, it does come with a word of warning. Family pledge loans see your close family members sharing some of the liability, which means if you are unable to repay your loan, there’s a chance their property could fall into jeopardy. This risk has diminished significantly in recent years with pledges now a fraction of what they once were, but it’s still worth considering what you would do if you were unable to pay your loan. No loan is one-size-fits-all, so compare the pros and cons against your personal circumstances.
Frequently asked questions
What is a family guarantee loan?
A family guarantee loan is a home loan which lets borrowers secure a home loan with a smaller deposit amount than the usual 20% required to avoid Lenders Mortgage insurance (LMI). If you are struggling to save such a large deposit amount, relative to the cost of the property you want to buy, a family guarantee loan could be useful.
How does family home guarantee work?
A family guarantee loan allows borrowers to use some of the equity in their parents' home in place of a deposit. A lot of older parents have paid off or mostly paid off their home loan, giving them access to high amounts of equity.
This can be transferred to a new borrower, and a home loan secured. This will also mean as regular repayments on the new loan commence, the parents, or guarantors are paid out first, leaving their children as the sole owners of the loan.
Can you borrow 100% with a guarantor?
In some cases, yes. It's worthwhile discussing this with your chosen lender to see if this is an option they allow.