What is a Family Pledge Loan?
A Family Pledge Loan allows a close family member, typically a parent, to use the equity in their own property as additional security for the buyer’s home loan. This means the buyer may not need to provide a full deposit themselves, and in some cases, may avoid paying Lenders Mortgage Insurance (LMI), which can significantly reduce upfront costs.
Here’s how it can help:
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Borrow more with a smaller deposit: The guarantor’s equity helps strengthen the loan application, allowing the buyer to borrow a higher percentage of the property’s value.
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Avoid LMI: With additional security provided by the guarantor, lenders may waive the need for LMI, which is typically required when borrowing more than 80% of a property’s value.
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Enter the market sooner: Buyers can purchase a home earlier than they might have been able to if they were saving for a full deposit, which is especially helpful in competitive or rising markets.
However, it’s important to understand the responsibilities involved. For the borrower, it means committing to a loan that may be larger than they could secure on their own. For the guarantor, it means putting part of their own property’s equity on the line- if the borrower is unable to meet repayments, the guarantor may be required to step in.
Before proceeding, both parties should consider:
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The financial stability and repayment capacity of the borrower
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The impact on the guarantor’s own financial situation and future plans
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Whether the guarantor is comfortable with the level of risk involved
At Mortgage Advice Bureau, we’re here to guide you through the process. We’ll help you understand how Family Pledge Loans work, assess whether it’s the right fit for your circumstances, and help to ensure everyone involved is making an informed decision.
Please note we do not provide tax, legal or accounting advice. The information provided is of a general nature only. It does not take into account the objectives, financial situation or needs of any particular person. We suggest you consult with your own tax, legal and accounting advisors before engaging in or considering the appropriateness of any transaction