It’s common for parents to want to help their babies, even when their babies are grown up and looking to buy their own family home! Using a Family Pledge is one way.
A Family Pledge is known by a few names; Security Guarantee, Limited Liability Guarantee, Family Guarantee. It all sounds rather confusing, so let’s break it down.
When you purchase a property, you get a loan from the bank. The amount of the loan is compared to the value of the property, this is what we call the Loan to Value Ratio (LVR). In most cases, when your LVR is above 80% you must pay Lenders Mortgage Insurance (LMI). This is an insurance policy that protects the bank in case you default (don’t pay) on your loan, and the sale of your property does not cover your loan amount.
- Purchase price $500,000
- Loan Amount $400,000 = LVR 80% (No LMI Payable)
- Loan Amount $450,000 = LVR 90% (LMI Payable)
Still with me?
It is very common for purchasers to pay LMI, as let’s face it, saving a 20% deposit is one massive task these days. You can find banks that will lend up to 95% LVR.
What if you could avoid paying LMI but not have to save 20% deposit? This is where your parent/s can help.
Your parent/s may be able to use their property to provide the 20% deposit. They can allow the bank, which are giving you a loan, to register a mortgage on their property, waiving the requirement for you to contribute 20% in cash and potentially saving you thousands of dollars in LMI.
In the unfortunate event that you default on your mortgage on your home, the bank has the right to take the 20% from your parent/s that provided the guarantee.
Let’s use a scenario to simplify it further
Adam and Anne want to purchase their first home together but don’t have the 20% saved up yet. They found a property for $500,000 and don’t want to miss out.
Adam’s parents Bill and Brenda own their home outright and really want to help out but don’t have cash savings to gift to Adam and Anne.
Adam and Anne talk to their Finance Broker and find that they can get a loan of $500,000 through Z Bank. Z Bank will allow a Family Pledge, allowing Adam and Anne to borrow the full amount of their purchase.
An application is approved for Adam and Anne for $500,000 which they use to purchase their first home. Z Bank register a mortgage over this new home, plus a mortgage on Bill and Brenda’s home which is limited to $100,000 (20% of $500k).
In the event that Adam and Anne don’t pay their repayments, Z Bank can take court action to sell Adam and Anne’s house, plus recoup up to $100k from Bill and Brenda if there is a shortfall.
Family Pledges can be complex, there are a lot of variables that need to be considered. For more information call Ellen on 0423688756 or get in touch here.