Tags: Home Loans, First Home BuyersMarket Update | 19.10.10

Family Pledge or Guarantee for Australian Home Buyers

In Australia, a Family Pledge or Guarantee is a unique home buying solution which helps customers secure a home loan, or to repay an existing home loan. The Family Pledge or Guarantee home loan is extremely useful for first time home buyers and other home buyers who need to borrow more funds than they may personally be eligible for. It helps make it possible for the home buyer to purchase a property they really want, and not settle for a cheaper alternative. Depending on how the Family Pledge or Guarantee home loan is created, a family member can assist the home buyer without taking on another financial commitment in their name, if they provide security support only, for example.

Who should use one?

Family Pledge is most suitable to first time home buyers who do not have a deposit for their home purchase. A family member who is willing and able can provide security support, typically offering their own home as additional security towards the home buyer's new home purchase, which in turn allows the buyer to borrow the purchase price of the home plus an additional 10% to cover extra costs.

How does it work?

Family Pledge home loans are not as risky as they sound. The guarantee is limited to 25% or less of the loan amount. The home buyer can also apply for income protection insurance and life insurance, to reduce the risks that they would be unable to make loan repayments. The insurance protections would then kick in and cover the mortgage payments under covered criteria – such as a loss of a job or if the home buyer passes away before the mortgage has been repaid. As soon as the home buyer has paid the mortgage to 80% of the home's value, the family pledge or guarantor can be removed completely.

Benefits of a Family Pledge home loan in Australia:

Risks to the Guarantor:

If the home buyer did not purchase income protection insurance and loses his or her job – the lender will then ask the guarantor to make repayments until the home buyer is able to, again. If the home buyer dies before the mortgage is repaid, the guarantor will be asked to make repayments unless the home buyer purchased life insurance to cover the home in the event of death. The worst case scenario is that the lender will try to sell the home to recover their money, long before they attempt to sell the guarantors home used as collateral.

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