De-Mystifying The Parental Guarantee (AKA The Family Pledge)

 

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

Share

About Virginia Graham

Virginia Graham manages Model Mortgages, and is a qualified financial planner. She is regularly consulted by the Austereo MMM radio network on interest rates and has appeared on Channel Seven news and current affairs programs as well as more recently the Ch 9 Today show. Virginia previously worked for ANZ Bank’s Treasury department as an interest rate dealer and for stockbroking firm Salomon Smith Barney. She has a bachelor of commerce majoring in finance, banking and business economics. Earlier in her career, Virginia was a fashion model in New York, and has appeared on the cover of several fashion magazines, including Australian Vogue. She wrote a book Flirting With finance and is a regular contributor to Woman’s weekly online and hosted a series of finance videos for the Sydney Morning Herald and the Age.

You May Also Like

One comment

  1. Britanica
    December 16, 2016 at 1:26 pm

    This is fantastic! I had no idea that these things actually existed. My nephew would actually love to buy a house (he is 22) but has been putting it off because he just can’t get around the huge deposit and the insurance that follows owning a home. I am going to share this post with my brother. I am sure he will read through it and run it by my nephew. I would love to see him owning his first home before he is 23. I feel so bad that young adults these days have to wait till they are in their 30’s and sometimes 40’s before they can buy a home.

Comments are closed.