Family Pledge Guarantor Loans
Family Pledge Guarantor Loans
Family pledge guarantor loans are a home loan product designed for home buyers that either do not have any deposit saved or only have a minimal deposit saved. In these instances a family member can assist by offering to go guarantor and offering equity in their property. This will remove the banks requirement for a deposit to be saved and can allow the purchaser to borrow over 100% of the costs. The loan is split into two parts. This is done to limit the amount of the loan for which a guarantee must be provided. Refer to the example below of a purchaser in Qld which demonstrates how this can work in practice.
How it works
In the above example there is no guarantor required for loan 1. A guarantor is only required for Loan 2. Both loans are primarily secured by the new house and by the borrower. Loan 2 is also backed up by the guarantor and by their property. This structure limits the exposure of the guarantor to Loan 2 being $112,105 rather than the guarantor being exposed to the entire debt.
This guarantee must stay in place until either the loan 2 is repaid in full or if the property increases in value the loan could be restructured later and the guarantor removed.
Benefits to Family Pledge Guarantor Loans
Finance can be accessed without any deposit. It can take a lot of time to save a deposit and opportunities can be missed especially in a property market where prices are rising.
You can borrow up to 110% of the purchase price so if there are extra costs you can often borrow extra to cover these costs as well.
Mortgage insurance can be a significant cost if you do not have a 20% deposit. Even if you have saved a 5% deposit and can qualify for a loan on your own a family pledge guarantor loan can be worthwhile so that you do not incur this cost. The family pledge guarantor loan does not effect your eligibility for stamp duty concessions and government grants.
Disadvantages to Family Pledge Guarantor Loans
There is a risk to the family member that offers the guarantee which must be carefully considered.
This loan structure will effect the financial position of your family member as they will have reduced borrowing power and reduced available equity in their home to the extent of the guarantee provided. In the above example the impact will be limited to $112,105.
It will still be necessary for us to discuss potential risks to your family member. If they have plans to buy further property or access their equity for other reasons, then it is important for this to be considered.
If your family member needs to sell the property which is guaranteeing the loan then some changes must be made. If they have alternative property to offer as security, then this can be an option or if they plan to sell and buy a new house then it may be possible to transfer the security to the new property. Otherwise they will need to repay the loan from the sale proceeds. The key here is for the future plans of the guarantor and the borrower to be considered any potential risks or restrictions from the structure should be understood by all.