Family Pledge Loans

Get on the property ladder faster with family pledge loans via Savvy. How they work and how to qualify quickly online.

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, updated on August 8th, 2023       

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Family pledge loans – buy a home sooner 

Houses don’t seem to get any cheaper, and that makes buying one harder and harder. Depending on where you live, saving a deposit for a home can be challenging or even unachievable. By the time you’ve done some saving, property prices have probably risen once again – and your rent payments never stop. It can be a frustrating, repetitive cycle, and you can end up feeling like you’re never going to get where you want to be. Family pledge loans are a way to enlist the support of a family member when it comes to putting down a deposit on your home. They work pretty much like any other mortgage – they just provide a way to get started.

How Australians use family pledge loans

More and more Aussies are turning to family pledge loans as a way to break that negative cycle. They provide a way to leverage some of the equity in a family member’s property and make up the shortfall on your savings to put a deposit on a home. The equity serves just as a deposit would – offering the lender additional security and demonstrating that you’re serious about buying a house. Yet, you can act right now instead of waiting for property prices to rise, paying even more rent, and trying to save up even more money. Guarantors only need to cover your deposit, but that means you can avoid paying lender’s mortgage insurance too.

Who can be a family pledge loans guarantor?

Most lenders will accept family pledge loans applications from borrowers with a guarantor who is a member of their immediate family. Firstly, you’ll need to discuss every aspect of your home loan borrowing carefully with your potential guarantor. Talk about all the risks, benefits, and possible problems before you apply.

Guarantors will need to be a sibling, your mother or father, or a grandparent to qualify. All lenders insist you both be over eighteen and an Australian citizen or resident, and some may have an upper age limit in place, too (Usually 65). The guarantor will need to have a certain amount of equity in their own property to be considered as part of a family pledge application. You’ll need to work out how much you need to borrow and the amount they’ll need to provide security for. It might be that you have to look at alternative homes to meet the qualification requirements and your chosen guarantor’s ability to contribute.

Both you and your guarantor should take stock of your financial situations before you apply. Initially, they’ll need to make sure they can provide enough security for your borrowing, but it’s a good idea that each of you checks your credit ratings, too – because the lender will. From your end, don’t apply to borrow more than you can comfortably afford to repay. Remember that they don’t call it the ‘property ladder’ for nothing. This is likely just the first rung on your journey upward, so be realistic. You can always trade up as your finances improve or your career progresses.

How does a family pledge loan work? The process explained

The two components of a family pledge loan

When you apply for a family pledge loan, the lender will look at the price of the house you want to buy and then do a simple calculation that defines two different things:

  • How much you, the homeowner, needs to borrow.
  • How much security the guarantor needs to provide.

How to qualify for a family pledge loan

In terms of the numbers, there are two primary requirements to fulfil. You’ll need to qualify for borrowing the amount you need, and the guarantor will have to do the same concerning the amount of security. Lenders approach that in precisely the same way as with any other loan. They’ll look at your credit ratings, earnings, and spending to make a decision. They’ll also assess how much of their home the guarantor owns.

The traditional mortgage calculation

Your loan is going to work a little differently than a traditional home mortgage. This is what a regular home loan structure looks like:

Value of Your Home Deposit Required Borrowed Amount
$300,000
$60,000
$240,000

Your home costs $300,000. To avoid paying lender’s mortgage insurance, you’ll need to put down a $60,000 deposit, and our total borrowing will be $240,000.

How family pledge loans get calculated

Here’s how home loans look different when you use a family guarantor. Essentially, you won’t be borrowing the same amount on the same home. That means a couple of things. Firstly, it enables the guarantor to retrieve their security as soon as you achieve the required LVR, and secondly, you get to borrow more than with a traditional home loan:

Value of Your Home Lender Calculation Family Pledge Borrowed Amount
$300,000
$375,000
$75,000
$300,000

The lender counts the cost of your home ($300,000) as 80% of your mortgage amount. You can work out the calculation yourself. Divide $300,000 by eighty, which gives you $3,750. That equates to 1% of the total value of your family pledge loan, which is $375,000. That means your guarantor will need to provide security of $75,000.

Achieving your loan to value ratio

It may seem slightly complicated, but the goal of a family guarantor loan is to help you achieve that magic 80% LVR. You essentially get to borrow up to the total cost of your home, and you’ll spend the first portion of the term paying down against the provided security – while building that required equity all the time. After that, your home loan works pretty much like any other mortgage.

How do lender’s mortgage insurance (LMI) and my loan to value ratio (LVR) work?

Loan to value ratio sounds a little complicated, but it’s very simple. Let’s say you’re buying a house worth $500,000. To avoid LMI – which we’ll look at next – you’ll need to achieve a maximum LVR of 80%. It’s all about the lender’s risk. Providing a 20% deposit covers them against a worst-case scenario like a default. On your $500,000 home, that deposit would equate to $100,000, and you’d be able to borrow the remaining $400,000 without paying LMI because your LVR would be 80%. If you only had a 10% deposit of $50,000, you’d have an LVR of 90%, and you’d need to pay LMI. The ideal way to achieve the required LVR is to save up enough of a deposit before applying for a home loan. Unfortunately, for many of us, that can be easier said than done, and that’s where family pledge loans can help.

Lender’s mortgage insurance is a one-off insurance payment designed to get you into your own home more quickly – but it carries some disadvantages. If you’re short of a 20% deposit, your lender will require you to pay LMI, which adds to your loan’s total cost. The amount is based on the total value of your borrowing and can add up to several thousand dollars. That means you’ll pay more interest over the course of your home loan. LMI is there to protect the lender, not you. That means it won’t help if you fall ill or get injured and can’t work, or if you lose your job during your home loan term.

The pros and cons of family pledge loans explored

PROS

Make home loans more accessible

Most potential buyers are prevented from owning a home because saving for a deposit is either extremely difficult or impossible. Family pledge loans leverage the support of your loved ones and remove the need for years of saving, meaning you can get on the ladder right now.

Retain access to assistance and eligibility for grants

If you’re a first-time buyer, family pledge loans don’t prevent you from accessing a First Home Owner’s Grant and other government assistance schemes. Traditional guarantor loans (where the pledge extends to the entire loan) prohibit that.

Limit your family’s risk

Those traditional loans were far more of a risk for guarantors, but with a family pledge loan, the lender will only ask for a guarantee so you can achieve a minimum of 80% LVR, so you can avoid LMI. It’s basically your family member helping you with your deposit – not the entire home loan.

No LMI when you can’t afford the full deposit

Buying a home can be an uphill battle. Usually, if you can’t raise a minimum of 20% of the value of your new home from savings, you’ll have to pay costly LMI instead. That’s often why borrowers who’ve managed to save a chunk of their deposit still can’t access a loan, and family pledge loans remove that problem.

CONS

Guarantor risk

Even though the risks are reduced, they still exist, so it’s important to get the right advice and consider all the possible outcomes. As with anything, it’s a good idea to have a back-up plan, make sure the primary borrower has income protection insurance, and discuss every aspect of a family pledge loan before you commit.

Not every lender will help

Often, banks and independent lenders don’t offer a comprehensive range of home loan products – so, you might find it challenging to find the right product for you. It’s essential to explore as many family pledge loan options as possible, and you can access an extensive panel of specialist lenders via Savvy.

Family pledge loans FAQs – all you need to know

Can I still use first-time buyer grants with family pledge loans?

Before family pledge loans came along, using a guarantor as a first-time buyer could be a little prohibitive, but that’s changed. Modern loans don’t require that the guarantor be listed on the property title like in the past, so you’re free to access any national or state-based assistance programmes for first-time buyers.

What if my family pledge loan guarantor’s property is mortgaged?

Depending on the lender, you may be able to use family pledge loans when your relative’s property has a mortgage on it. That’s going to depend on how the loan provider assesses applications and the amount of equity the guarantor has in their home. If they don’t owe too much, a Savvy consultant will likely be able to find you a lender that suits you.

What risks affect the family guarantor?

The guarantor is exposed to risks connected to your borrowing, but that doesn’t always mean they’ll lose their home in the event you experience problems – and that’s always a last resort for lenders. It may be that you’re already some way to repaying your mortgage when a problem arises, in which case, the guarantor may be able to leverage savings or alternative borrowing to make up any shortfall in the pledged amount.

Do I need income protection insurance?

Income protection is always a wise move when you take on a mortgage of any kind, but it’s particularly advisable when you’re using a family guarantor. All it means is that should you become ill or have an accident, your half of the family pledge loans bargain is protected. Income protection insurance is also a way to protect your property investment. While you’re younger, you have the potential to earn a lot in the future, and getting a policy in place means you’ll be protecting that potential to earn as you move forward – and your ability to own a home.

Can my guarantor provide security for less than 20% of the cost of my home?

Absolutely. If you’ve managed to save some of the 20% deposit, you can apply on the basis that your family member just makes up any shortfall.

When will my guarantor get their money back?

Each lender has a different process for this, so it’s a great idea to have a broker on side who knows the ins and outs of various products. Usually, family pledge loans are connected with you gaining 20% equity in your home. Once you’ve achieved that via regular mortgage payments, then the guarantor’s pledge will no longer be required. There’s no set date for removal of the pledge, and you’ll likely find it happens sooner than you initially expected because property prices often rise over time, increasing your equity.

Why use a family pledge loan broker?

Just like any form of lending, different family pledge loan providers have various methods for assessing applications. Almost no case is entirely cut and dry. It could be that your guarantor has a mortgage, but you may still qualify for a family pledge loan. Each borrower and guarantor has specific needs. Using a broker like Savvy means your consultant will scan an extensive panel of home lenders to find the loans and requirements that suit you. That will save you a lot of time and refusals, and it’s better for your credit rating because multiple applications have a negative effect on your borrowing ability.

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