Parents help out with home ownership

Parents help out with home ownership

With interest rates at record lows, the great Australian dream of home ownership has come back into focus for the younger generation.

But for some, having saved sufficient deposit is still a barrier and this is where parents can and are increasingly helping out.

Mums and Dads might not be able to stump up the cash deposit themselves, but if they have equity in their own home, they may be able to assist with a Family Pledge, sometimes known as Family Guarantee, home loan.

We predominantly see this arrangement between parents and their children, although some banks will consider other family members as guarantors in particular circumstances.

The appeal of Family Pledge loans is that Mum and Dad can help out with security but don’t have to actually gift cash for a deposit. Parents are saying, get in now while rates are low and buy your first home… we will give you a hand with the security. For a long time, parents have worried about how their children will ever afford their own home with high interest rates and living costs preventing them from saving sufficient deposits.

Family pledge loans are commonly used to guarantee enough equity so that the borrower avoids paying Lenders’ Mortgage Insurance (LMI) – this equates to a guarantee of 20 per cent of the purchase price of the new property, if the borrower has no deposit.

This set up really allows the new home buyer to maximise the amount they borrow and they may also have access to the First Home Owners’ Grant.

Care is taken to ensure the borrower can meet overall repayment commitments and service the loan based on their own income so they is no reliance on the parents/guarantors income to service the loan.

The Family Pledge loan limits the amount of the guarantee, rather than a traditional open guarantee for the entire loan amount and this can make the parent/guarantor feel less is at risk should the borrower default on the loan. The borrower should also be adequately covered with a Loan Protection Plan.

There are a number of Family Pledge loan products now on the market being offered through a variety of Australia’s banks and we can assist in determining the best pathway for you and your family.