Jack and Amy are a couple in their early 30s. They had been renting together for a couple of years and approached me to discuss options. They were convinced that buying a home was out of reach, but a mutual connection had recommended they speak to me anyway.
Both Jack and Amy are established in their careers and earning good money. The issue for them was not whether they could afford loan repayments, but rather that they did not have much in savings. A large portion of their income was going to rent and they were taking longer than they wanted to get a deposit together. They had $30,000 between them and wanted to buy an $800,000 property.
Amy’s parents are retired and own their home outright. They were just as keen for Jack and Amy to be able to buy a home as Jack and Amy themselves. They had previously assisted Amy’s brother and wanted to do the same for Amy and Jack.
With the assistance of Amy’s parents, we were able to get what is known as a guarantor loan or a family pledge loan. This is how is worked out:
Jack and Amy found a house for $800,000
Jack and Amy borrowed $810,000 which was about 101% of the value of the house
Amy’s parents put their home up as security to cover part of the loan
Jack and Amy used their $30k in savings to cover stamp duty and other costs on the purchase
Amy’s parents guaranteed part of the borrowings using the equity in their own house. By allowing Jack and Amy to use their home’s equity they could:
Borrow enough money to get the home they were after without saving a larger deposit
Avoid paying lenders mortgage insurance (LMI), saving thousands of dollars
The way a guarantor/family pledge works is that there are two loans – in this instance there was one for $640,000 and a second one for $170,000 (total $810,000). The second loan was guaranteed by Amy’s parents with their property as security. Jack and Amy are responsible for repayments on both loans, with Amy’s parents guarantee coming into effect if Jack and Amy fail to make their repayments. Over the next couple of years, Jack and Amy will pay down the loans and hopefully the property value will rise. Once the loan to property ratio comes down sufficiently Amy’s parents will be released from their guarantee.
Guarantor/family pledge loans are usually not the first option I recommend: there are risks that need to be understood by all parties. In this instance it was suitable as Amy’s parents were experienced and comfortable with the process. This was a great outcome that brought forward home ownership for Jack and Amy by a couple of years at least.