Module 2 – Lesson 3 – Family Pledge Loans (6 Min)

In this lesson, we discuss everything to do with family pledge loans, what are they and when do you need to use them.

Did you know?
Did you know goosebumps are caused by a muscle?
At the base of every hair follicle are tiny fan-shaped muscles called Arrector pili. These muscles contract when the body is cold in an effort to warm the body up and cause a person’s hair to “stand up straight” on their skin aka goosebumps.

Prefer reading? Here is a transcript of the video:

Hello and Welcome. This is Paul Pappas from Mortgage Choice. As a first-time buy, it is very common for you to be engaging in conversation with your various family members, your parents in-particular, about buying your first property and what your aspirations are, and they might be wanting to help you how can they do it. So, it is very common these days for family members to be wanting to help you. Especially with the increasing value of Sydney property prices and the inability. In some cases or difficulty of first home buyers being able to obtain a deposit and get into that first pro that property market for the very first time.

So, how can family members assist by way of a family pledge or a guarantor support loan? They can also be called the same. Essentially, what happens here is this and that is that the family member is providing security support to your borrowing, if they are only providing security support you have to be able to afford the loan yourself. In other words, your family members can’t chip in $1,000 a month or whatever the case might be in terms of helping you repay the loan. They can only provide you with security support, to assist you with your deposit.

So, the critical thing is here, and that is that your family member provides a guarantor or mortgage support but no not support in terms of your repayment capacity or borrowing capacity. You must be able to service the loan in your own right, and that’s for legal reasons and many other reasons as well. So, what are the benefits of family guarantor loans? Well, it allows you to be able to borrow a lot sooner than what you would like, what you would have thought I should say. So, a massive advantage here because you don’t necessarily have to save for that 5% or 20% deposit that you thought that you really needed to, so even if you don’t have a deposit, yeah, you can buy into the market.

Now, so, it allows you to buy sooner you avoid mortgage insurance altogether, and we’d have a separate modules video on mortgage insurance. The cost of that mortgage insurance is not required when you have a family guarantor loan. So, that can save you a significant amount of money and is usually the reason why guarantors or family members assist you. It can maximize the amount that you can borrow because, obviously, you’re not having to pay for the mortgage insurance.

So, you’re maximising how much you can spend, of course, with anything. There are some negatives here, right. You do need to have lending support in the sense that your parents must mortgage their property. We will only deal with what we call limited liability mortgages, and we do need to talk to you and your parents about what we mean by that, but we certainly what we briefly what we’re getting at here is this, and that is we will only recommend loan products where the mortgage being offered by your parents is limited to a particular amount and, therefore, that the recourse that the lender has against your your parent’s property is also limited the main recourse that the lender has in a default situation is the property you’re purchasing.

So, we’re not exposing you or not fully exposing your parent’s hard-earned assets; a consideration that your parents need to consider it might restrict their ability to be able to borrow money, and of course, siblings and other family members need to come into play here as well. So, it is very important that you assess these pros and cons. Our general advice is this, and that is, these applications are very complex. Especially if your parents would prefer to provide guaranteed support as opposed to a gift of some kind, so, they are complex, and we do need to talk to all parties concerned. They do tend to take longer for a pre-approval.

So, you know, talk to us at the early stages. We prefer that guarantor or your parents have other assets as well or their self-funded retirees, and so they’re not necessarily mortgaging their principal place of residence whilst they’re on a pension at a retirement stage. That’s something that we would prefer not to do for. I suppose some obvious reasons a lot of lenders these days would do require your parents to obtain independent legal and financial advice. So that they fully understand their obligations, to be perfectly honest, we would want to be talking to your parent as well.

So, that they fully understand the obligations that they’re doing apart from the fact that they’re obviously here to help you and buy your first property, which is fantastic, they do need to understand the risks involved to them and the negatives as well as the benefits we do need to talk to you and your parents. As I’ve said before about the pros and cons of all this and there and the loan types that meet your requirements because there are different types of family support loans that are out there them we recommend some of them that we don’t recommend.

So, please do talk to us in terms of the various loan products that would best suit you. As always, do seek our advice. We’re here to help you, so thank you for attending, and well-done, thanks!

Disclaimer: The information provided on this website is for general education purposes only and is not intended to constitute specialist or personal advice. This website has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should consider the appropriateness of the advice to your own situation and needs before taking any action. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy.