A family pledge loan is a loan where parents or relatives provide assistance in the form of additional security to bring the LVR (Loan to Value Ratio) to 80%, hence avoiding the need for lenders mortgage insurance (LMI).
Example –
Mark is on a solid income and wants to buy his first owner occupied property for $500,000. Mark has minimal savings as he has been paying a significant amount of rent on a monthly basis. Mark knows that the rent he has been paying is not too dissimilar to potential mortgage payments and feels that he can afford the loan repayments.
Marks parents (who have a small loan of $100,000 on their property worth $700,000) would like to help so they call in the professionals at Trusted Finance Solutions.
COSTS
$500,000 Purchase Price
$ 12,500 Est of Govt charges as at March 2015 for first home buyer in Vic
$ 1,000 Conveyancer and bank set up costs estimate
$513,500 Total cost estimate
FUNDING
$513,500 Total funding / new loan
SECURITY –
$500,000 New property purchased
$141,875 Parents security in the form of a limited guarantee
$641,875 Total security
LVR –
80% ($513,500 loan / $641,875 total security)
In summary, based on Marks income and expenses, he has the ability to take on a new loan of 100% of the purchase price plus costs, totaling $513,500.
In this example, Marks parents provide additional security from their property in the form of a limited guarantee totaling $141,875.
NOTE – Mark will, in most cases, need to provide some form of deposit to the vendor / seller of the property but can always negotiate that right down as the 10% standard deposit is not set in stone.
Alternatively, Mark could get a short term gift from parents for the deposit to the vendor and then repay those funds when his loan settles.
Benefits:
- Marks parents help their son obtain a property. Given Marks lack of savings, he is unable to enter the property market without their help.
- Mark is able to enter a hot property market now, potentially saving himself thousands of dollars in lost growth.
- Mark stops paying rent and starts paying a mortgage on a property he hopes to eventually own outright in the years to come.
- As the loan is at 80% LVR, Mark does not need to pay Lenders Mortgage Insurance (LMI) and saves himself thousands of dollars by avoiding LMI.
- Marks parents do not have a new loan or have to make any repayments. They are just using a relatively small portion of the equity in their home to assist their son.
- The limited guarantee will be released in due course when the equity in Mark’s property grows and/or the loan balance is paid down to the level where the LVR is 80% without the parents property being used as additional security.
- Marks parents will have to take out independent legal advice in most cases to ensure they understand the pros and cons with helping their son.
