With Australian property prices rising and significant ongoing increases to the cost of living, it’s little wonder that many potential first home buyers struggle to pay rent as well as saving a deposit on a new home and as such lose faith in being able to achieve the Australian dream of home ownership.
However there is a little known and often misunderstood policy offered by a number of home loan lenders that could help – it’s called Parental Guarantee, or Family Pledge.
Parental Guarantee/ Family Pledge policy works broadly as follows:
• Parents/Family member have a home, investment property or term deposit and are prepared to offer one of these assets as security in order to provide a limited guarantee for up to 20% plus costs of the purchase price of son/daughter/family-members property
• Son or Daughter can then borrow up to 100% of the purchase price of the property plus stamp duty and legal costs. This would allow them to avoid having to save a substantial deposit as well as avoid paying a significant Lenders Mortgage Insurance – LMI – premium
• The limited guarantee can be removed when the borrowers loan becomes less than, or equal to, 80% of the value of the property – by way of increased value in the property and reduction in loan. The loan can even be split 80/20 with 80% on interest only and 20% on principal and interest with an aggressive repayment plan set up to pay down the 20% amount guaranteed in order to remove the guarantee in a timely manner
• Parents need to confirm that they have sought independent legal advice on the guarantee arrangement in order that they fully understand the parameters of offering their guarantee (once the loan has been approved and loan contracts are ready to be signed by the borrower – with separate contracts are available for the guarantor)
• If parents offer a property for the guarantee and that property has a mortgage against it, the new loan will need to go with the same bank….or be refinanced to the bank the borrower is applying with. Also, the bank will not lend to more than 80% of the value of parents property when amount of existing mortgage and guarantee are combined
• Parents should be aware that the security they offer, whether that is cash on term deposit or their investment property or home would be at risk if the borrowers’ loan went into default and the bank was unable to recoup amount of loan through sale of the borrowers’ property
• Some lenders require the guarantor to be able to display ability to repay the guarantee amount (so that in the event the loan goes into default and the guarantee is called upon by the bank, guarantor has ability to make repayments instead of having their property repossessed