Family Pledge Home Loans in Australia

Family Pledge home loans are also known as a loan with parent(s) as guarantor(s).

This is a term for a borrowing option that allows family members to provide a guarantee to assist a borrower. This is by either using equity in their own property as security for a loan, or by providing regular payment assistance to a borrower (or both).

The benefits of having a guarantor are as follows: 1. The borrower can avoid paying Lender's Mortgage Insurance and save many thousands. 2. The borrower can purchase a property that would otherwise be out of reach. 3. The borrower can possibly borrow 100% of the property value plus purchasing costs, so needs no deposit or contribution to buy a property. 4. A family member can help a borrower who cannot afford repayments on their own.

There are two general types of homeloans which allow family members to become guarantors:

1. Repayment guarantee loans: this is where the guarantor offers to provide a certain regular payment to assist a borrower in making repayments. This type of loan arrangement is unusual but does exist and at negligible extra cost. This usually requires the borrower (not the guarantor) to have equity in the property in question. 2. Security guarantee: This is where a family member offers to allow the lender to "take security" over their property, so that the borrower is in effect borrowing (partially) against somebody else's property.

There has been a considerable increase in this trend in the last one to two years due to increased housing prices. People are finding it's harder, and taking longer, to save money they need to enter the home loan market. Particularly while there's no stamp duty for first home buyers on properties up to $500,000, borrowers are saying ‘we're not quite ready yet but let's enter the market while prices are still relatively low'.

Seeking independent legal advice prior to signing is an important consideration; so all parties fully understand their obligations to the home loan.

There are ways of making this more palatable for the guarantor, however the guarantor can only be released from the guarantee under certain strict conditions. The guarantor is liable to meet the home loan repayments if the borrower cannot. In a worst case the bank could sell the guarantors property, or urge the guarantor to pay outstanding debts incurred by the borrower.

One point to note is that not all lenders accept guarantees but there are many lenders who do. There are many considerations to take into account that depend on personal circumstances.