With the ever-increasing price of property, it may not be realistic for you to save up a large-enough deposit to buy a residential or investment property anytime soon. However, if you have an immediate family member who has a good equity stake in their property, then you can ask them to act as a guarantor for your loan. This may give you the ability to borrow up to the full value of your desired property.
In order to make use of the Family Pledge loan, you still need to be able to make repayments towards the loan on an ongoing basis but the initial requirements for a deposit won’t apply. Once you have paid off enough of the loan and your equity in the home is substantial enough, you can then look at refinancing the loan to pay off your relative.
A Family Pledge loan is a great option to help you get your foot in the door in a hot property market.
Buy a home or investment property without having to provide a deposit
Borrow up to 100% of the purchase price and a further 10% to cover the purchasing costs
It is possible to redraw or re-finance to repay the family member once sufficient equity is built up in the property
It's necessary to weigh up the risk of getting family involved as relationships may be strained if something go wrong
How Can Family Pledge Loans Help Me Into The Property Market?
Getting started in today’s property market can be tough. Every little bit can help, and a family pledge can go a long way to helping you choose from the mortgages you need, to make your property dreams a reality. Having help to secure a deposit needed for a lot of mortgages in the current market can be a Godsend. An immediate family member who has a good equity stake in their property can make a big difference, and a Mortgage House family pledge loan can get you started. Family pledge mortgages can give you the ability of borrowing the full value of your desired property, and the extra costs and fees on top, utilising a percentage of the value of the residential real estate of an immediate family member (who provides a fixed guarantee) to bring the overall LVR within an acceptable level to the lender. You still need to convince a lender you can make the repayments over the life of the loan, but once you have paid off enough, and have enough equity in your new home, you can refinance the loan to allow release of the family pledge.
What are the benefits of a family pledge (guarantee)?
There are lots of advantages when a family member guarantees a mortgage. The first clear benefit is that you may be able to buy a home without a deposit of your own. Secondly, you may also be able to borrow a further 10% to cover the costs of purchasing a new home, such as stamp duty. If the home is your first, you will still be eligible for the First Home Owners Grant, if your state currently has one.
How is the Loan to Value Ratio calculated?
A lot of the determination of whether or not someone is successful with an application for a family pledge loan is centred around the loan-to-value ratio. In a nutshell, LVR is the ratio of the amount of risk a bank or a lender is willing to take. They will need to know that if you default on the loan they will be able to sell the house and recoup their money. It makes a lot of sense. LVR is a calculation. It is the amount of the loan, divided by the purchase price, or the amount of the independently determined value of the property. So, for example, if your loan was for $400,000 and you bought the house for $500,000, then the LVR would be 80%. Banks and lenders like to keep the LVR at or below 80%. Anything higher and they may demand mortgage insurance, and offer you a higher interest rate. The bigger the deposit you can get, including with the family pledge, the better. A deposit of 20% can give you the 80% LVR immediately. But, don’t forget to include upfront fees and stamp duty in these calculations.
Are there downsides to a family pledge loan?
While there are plenty of advantages of a family pledge loan, there are also a few risks. Obviously the first one is getting family members involved in a mortgage of any kind can be risky. Relationships can easily be strained if you struggle with your repayments, or if your circumstances, such as employment, change rapidly. You may be putting your family’s home at risk as well. All these decisions, especially decisions around family pledge mortgages, need to be made with the best information possible.
Can I use a guarantor family pledge for other loans?
There can be a bit more to a family guarantee than just a home loan. Family guarantors can also be used to invest in an investment property, which can open up the amount of loans on offer, and give you more flexibility financially moving forward. The major difference is that guarantors become jointly and severally liable for the loan, the amount of the guarantee cannot be limited between borrowers. . The LVR rules are the same, as are the guidelines around a 20% deposit. At Mortgage House, we can answer any questions you have about buying a home or buying an investment property. And we can help you choose from a suitable mortgage to make sure you start on the front foot. We can also help you with refinancing down the track when it comes to family pledge mortgages, to help you pay your family member back, or help you move further up the property ladder.