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Family Pledge loans are where another family member supports your application for a home loan by either offering income support or the equity in their own property to help you obtain a larger loan than you would otherwise be eligible for.

Why would you use Family Pledge?

Examples of how a Family Pledge can be used to your advantage are as follows:

• You have children who have finished study and expect their income to grow steadily over the next few years but you would like to support them in purchasing their own property now.
• You would like to provide the additional security so your children can borrow a larger amount to get into a more suitable property but still avoid the expense of mortgage insurance.
• To assist one of your children to obtain their first investment property sooner rather than later.

How Family Pledge Works?

Equity Support

The most common form of family pledge is equity support. This is where you use the equity in your own home as security to allow a family member to purchase their own property.

Lenders Mortgage Insurance is generally payable on loans where the value of the loan is greater than 80% of the value of the property being puchased (called the Loan to Value Ratio or LVR). Depending on the price of the property it can be a very large expense and can only be avoided if you have a deposit of 20% or more and the funds to cover all the additional costs. (For more information see our section on Lenders Mortgage Insurance).

For people who have only a small or no deposit a family pledge can provide significant savings and make getting a loan approval considerably easier. Basically the bank lends up to 80% against the property being purchased. The additional funds needed to make up the 20% plus costs, less any deposit saved, are then secured against the property of another family member. The benefit being:

• Lenders Mortgage Insurance is avoided saving cost.
• By not having to get approval for lenders mortgage insurance it is easier for the bank to approve the application.
• Generally the liability of the person providing the pledge is limited to that portion of the loan greater than 80%, not the entire loan!

It is important to note that the property being used as security does not have to be the family home. It can be an investment property or any other acceptable type of property security.

Once either the loan balance is paid down, or the value of the property goes up, such that the LVR is now 80% or less against the purchased property in its own right then you may apply to have the family pledge removed.

Income Support

Income support occurs where the person requiring the loan does not have sufficient income for them to be approved for the loan amount needed. Given your own commitments are not too great you are able to effectively act as a guarantor for their loan to help them gain approval.

The biggest difference between Income support and equity support is that you are effectively helping support the entire loan amount. Accordingly you are liable for the entire loan amount, not just the amount borrowed above 80%.

Income support may be used in conjunction with equity support to help a family member to obtain their first property earlier. A common example would be a university graduate who is expecting considerable growth in income over the next few years.

Once the person whose loan is being supported can show sufficient income to support the loan themselves then you can apply to have the Income Support Guarantee removed.

Features of a Family Pledge?

A Family Pledge helps with the approval of a loan. Once approved you can generally all the loan types normally available at standard rates.

Examples of use:

The following gives you an idea of how a reverse mortgage might be used.

• Anita has just graduated from university as an Accountant. Whilst her income is low at present her family is confident that her income will grow and her employment prospects are stable and strong. Accordingly they decide they would like her to purchase her own property now. They use one of their investment properties to provide additional security to allow Anita to borrow a deposit of 20% plus costs and support her income wise to help her obtain approval on the loan.
  
  
• Jack is in his early 40’s and as part of a recent divorce settlement no longer has his own home. Whilst he has sufficient income he currently does not have any deposit. His family agree to provide the property security for 20% plus costs to enable him to get into a suitable property without the very high cost of Lenders Mortgage Insurance.
  
  
• Michael and Jane want to assist their son Andrew to buy his first investment property. Andrew has enough income and a 10% deposit, but Michael and Jane allow Andrew to use one of their own investment properties as security for the additional 10% plus costs so that he makes a significant saving on Lenders Mortgage Insurance.