There may be times where parents are cash poor but asset rich. They may not be able to give their children cash to help with buying their first home.
However parents can offer a piece of their property as security. This will help substantially towards keeping the risk low for the lender. It will also save young couples thousands on lenders mortgage insurance (LMI).
It also helps to secure a home loan when on their own, they may not have obtained.
Imagine that a couple went into their nearest St George branch. They discovered that they had enough borrowing power to borrow 95% of the purchase price of a home ($807500) . In this case for a home around $850,000 they may pay over $20,000 in LMI.
The couple has also saved around $50,000 to go towards the purchase. Though not enough to reduce their % of debt under 80% of the security price (LVR).
St George will allow applicants to buy a new home, by allowing the parents to provide a limited guarantee (2nd mortgage ) over part of the parents’ property. The limited guarantee amount is added to the new purchase price. This increases the overall security total.
In this case 95% of $850,000, a family pledge or limited guarantee of $201,875 added to the new purchase changes the ball game completly.
The debt of $807,500 now becomes only 80% of the total security base. This reduces the risk greatly for the lender.
I have written loans with these scenarios for couples wanting to buy a new home many times. St George are the leaders in this space. They treat the transaction primarily on the basis of the security provided, so it’s a quicker process.
Family guarantees work well when young couples have saved and can show a good character history of savings. These types of clients provide little risk to the parents and St George is happy to provide family pledges to clients like this.
What St George does not like to see is a family pledge purchase for a unit where the children have no savings. They then expect to borrow 100% of the property plus costs with a family pledge provided by parents.
This is because units can be volatile in certain areas and value decreases are not uncommon at times.
So when a young couple buys their first home as a unit at 100% of the contract price plus costs, then they open themselves up for having a debt that could be higher than the value of the unit.
Especially risky is when a family pledge is applied to an off the plan purchase. In these cases deposits are placed on units that are elevated when the units are sought after in the early stages. However by the time the units are ready to settle, sometimes 18 months later, there may have been so much other construction that this has brought down the final valuation considerably. This can leave the debt higher than the actual value of the new unit.
Seeking out a good mortgage broker who has experience with family pledges is a great start. This will get a step closer to buying your first home.
Westlend is a mortgage broking business located in Glenmore Park/ Penrith in the Greater West of Sydney. Our mortgage brokers Mark and Elyssa are specialised in the areas of refinance, New home loan purchases, cross-securitisation and clergy loans. you can contact us at https://westlend.com.au/contact/
Click on this link to access the Fact find on St George Family Pledges
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