A family pledge home loan is similar to a guarantor loan. Most home loans require a downpayment of at least 20% to avoid paying lenders mortgage insurance. A family pledge loan can help a borrower receive a mortgage without paying LMI, even if their deposit is as low as zero.
Family Pledge Loan Basics
A family member’s home is used as security on the borrower’s home loan with a family pledge loan. This family member uses the equity in their own home as part, or all, of the 20% deposit, saving the borrower from having to pay LMI. There are some risks for the family member whose property is used as security. If the borrower stops making repayments or can no longer afford to do so, they may be forced to sell the borrower’s property to recoup the loan amount. In addition, if the resale amount for their property does not cover the outstanding loan amount, the family member must pay off the rest of the loan out of pocket. If they cannot, they may have to sell their own property (the one used as security) to cover the remaining debt.
Why is Family Pledge Loans Popular?
Family Pledge Loans are popular among young people buying their first home because it can be difficult for them to save enough money for a deposit, especially because the price of property in Australia is so high. They are also popular because they often allow the borrower to redraw extra repayments. In addition, once they have enough equity in the property, they can refinance and use their own property as security instead of a family member’s property. Family Pledge Loans are considered low risk by most lenders.
If you are applying for a family pledge loan, working with the brokers at Mortgage House can help you secure a loan with lower interest rates and better terms.
