There’s no doubt about it, property in Australia is expensive. Saving for a 20% deposit is becoming more and more challenging and as home prices rise, so will the amount you need to save for that deposit. A Family Pledge Loan could help you buy a home sooner with a smaller deposit and without having to pay the cost of Lenders Mortgage Insurance (LMI).
With a Family Pledge Loan, the guarantor (your family member) will use the equity in a property they own as a security guarantee for your home loan. The guarantor won’t give you or the lender any money, but they will need to accept the commitments associated with entering into a Family Pledge Loan.
The guarantor’s security is usually the amount needed to get your deposit to 20% or in other words reduce your loan-to-value ratio (LVR) to 80% so you won’t have to pay Lenders Mortgage Insurance.
Let’s say you want to buy a property worth $600,000 and you have enough income to service a loan of that size. You’ve saved enough money to cover the transaction costs (stamp duty and conveyancing fees) and have $30,000 left for a deposit, which equates to 5% of the property value. Considering you need a 20% deposit or $150,000 in this case, to avoid paying Lenders Mortgage Insurance, you would need to save another $120,000 to get you to the 20%.
Instead of waiting to save that additional $120,000, which will keep growing as property prices rise, you decide to look at a Family Pledge Loan, using your parents’ home which has been paid off and is valued at $1,000,000. Your parents offer $120,000 of the equity in their home as security for your loan and you can now borrow the money you need without having to save further or pay the cost of Lenders Mortgage Insurance.
Unlike other financial institutions, Gateway’s required guarantee can be limited to a specific amount, which means the guarantor’s security could be released once the equity in your home reaches 20% of its value.