Did you know parental assistance for your first home loan, can come in forms other than a cash gift, informal loan or a full loan guarantee?
Yesterday, in Part 1 of our “Types of Parental Assistance” series we looked at the more conventional method parents can help their kids in obtaining a home loan – i.e. the family guarantee. Today we look at other types of help parents can provide to first home buyers when going for their first home loan.
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There are multiple ways a parent can help their kids buy their first home
Overtime, the Australian Financial Services industry has introduced new & innovative products enabling parents to assist their kids with their first home purchase. Whilst a parental guarantee for a first home buyer’s loan is still the most common form of assistance, new products & agreements are being introduced to protect the security the parents provide in the agreements.
In Part 2 (below) we look at the more unconventional method parents can help their kids in obtaining a home loan – the family pledge.
What is a family pledge?
This more recently introduced method of family loan assistance enables family members to use their own home’s equity to provide additional security for a portion of your (the first home buyer’s) loan amount. Most lenders don’t allow for the guarantee to be limited to a particular amount, however some lenders are now allowing partial guarantees. The guarantee can be limited to a specific amount, which helps provide certainty and allows the property being used as security to be released earlier than a full guarantee.
Benefits of the family pledge
- Family pledge’s are great for the parents because it means they aren’t required to provide a full guarantee (for the value of your home) they are only providing a partial guarantee, which gives them peace of mind. They also don’t have to pay any amounts in cash to assist you.
- From a first home buyer’s perspective this can allow a first home buyer to avoid the high cost of the Lenders Mortgage Insurance (LMI) premium, as the parents will guarantee the remaining deposit requirement (to avoid LMI).
- This method can help maximise the potential loan for a first home buyer, so you can purchase that dream home sooner.
- In most cases, the guarantor can keep their loan with their existing lender, ensuring less hassles for your parents.
The Great Australian Dream can be achieved with partial guarantees
Example of how this works:
If you are looking to purchase a property for $400,000 with a $20,000 deposit, you will have to pay LMI as you are borrowing 95% of the property value. However, if your parents agreed to provide a family pledge guarantee of approximately $76,000 – this will allow you to avoid the LMI costs, saving you thousands. Either party can request release of the guarantee (subject to approval) as the value/equity of your property increases*
*The above calculation is indicative only
It is important to note that the above scenario is a great option to cosnider if you don’t have enough in terms of a first home deposit but do have the ability to make the required home loan repayments. This is something an FHBA broker can help provide advice on, taking into account your circumstances.
If you are interested in exploring a family pledge further (and see if this can help you), our FHBA Brokers can help. FHBA Mortgages, powered by Mortgage Australia, have many years of experience with helping first home buyers with family pledge loans.
An FHBA Broker will help by guiding you and your family members who may become your guarantor.
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Feel free to share this post on social media and with your parents to learn how other people feel about this type of borrowing!