Family Pledge Home Loans in Australia

Family Pledge home loans are also called 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 lender. This is by either using equity in their own property as security for a financial loan, or by providing regular payment assistance to a debtor (or both).

The benefits of having to deal with a guarantor are as follows:

1. The borrower can avoid paying Lender's Mortgage Insurance and save many thousands.

2. The lender can purchase a property that would otherwise be out of reach.

3. The lender can possibly borrow 100% of the property value plus purchasing costs, so needs no deposit or contribution to buy a property.

4. A member of family can support a debtor who cannot afford settlements on their own.

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

1. Repayment guarantee loans: this is when the guarantor offers to provide a certain regular payment to assist a borrower in producing settlements. This type of loan arrangement is unusual but does exist and at negligible additional cost. This usually requires the borrower (not really the guarantor) to own equity in the property in question.

2. Security guarantee: This is when a family member offers to allow the lender to "take security" over their property, so that the debtor 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 really is harder, and taking longer, to save funds 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 necessarily 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 producing 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 satisfy the home loan settlements if the debtor cannot. In a worst case the bank could sell the guarantors property, or urge the guarantor to pay outstanding debts incurred by the lender.

One point to note isn't that all lenders accept guarantees but there are many companies who do. There are lots of considerations to take into account that depend on personal circumstances.