With soaring property prices and increased living expenses, saving for a first home can be a struggle.
But what if there was an easier way? A family pledge could be an option.
Having a family pledge (sometimes referred to as a guarantor) on your home loan will reduce the need of having a large deposit and means that you’ll be able to get into your first home sooner.
What is a Family Pledge?
A family pledge involves a parent guaranteeing part of your home loan with the equity in their home. This allows you to reduce the overall deposit required and means you avoid paying Lenders Mortgage Insurance (LMI).
While your parents aren’t required to make any repayments on your home loan, they could be asked to make repayments if you can no longer keep up them. That’s why being a guarantor is a big financial commitment.
Keep in mind: Your lender will check that you can service the home loan on your income alone, not your parent’s income.
Benefits for First Home Buyers
If you’ve saved a small deposit, having a family pledge will mean that you will either avoid or reduce the costs of LMI when you apply for your first home loan.
Benefits for Parents
A lot of parents we talk to want to help their kids with their first home deposit but don’t have the cash to give them up front. That’s where a family pledge can come in handy. Instead of cash, parents use the equity in their property as extra security on their kid’s first home loan. This reduces the amount of money their kid will need to borrow.
Example
MOVE Bank Member Rowan is looking to buy his first property for $500,000 and needs to borrow $480,000. In this instance, his home loan would have a Loan to Value Ratio (LVR) of 95% which would usually incur LMI.
Instead, Rowan’s parents decide to help Rowan out with a family pledge (using the equity in their property as security), reducing the total LVR and avoiding the need for LMI. This saved Rowan thousands of dollars and years off his home loan.
Get Advice
If you're considering a family pledge, it’s best to seek independent legal and financial advice so that you're aware of the risks involved.
Want to know a little bit more about how a family pledge can help you?
Send us your questions here or contact a MOVE Bank home loan specialist on 1300 362 216.
This blog post is for general information purposes only and is not intended as financial or professional advice. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product or other professional advice. You should seek your own independent financial, legal and taxation advice before making any decision about any action in relation to the material in this article.
Railways Credit Union Limited trading as MOVE Bank ABN 91 087 651 090. AFSL/ Australian Credit License number 234 536 | ABN 91 087 651 090.
