Family Equity Loans

A family pledge of a limited security guarantee is a facility whereby your relatives can help you purchase a home without them actually giving you any money towards the deposit. Instead, they use some of the equity in their own property to provide additional security for a limited amount of your loan.

This facility reduces the Loan to Value Ratio (LVR) and means that you could actually borrow up to 100% plus costs without paying any Lenders Mortgage Insurance (LMI) costs. This option can save you thousands of dollars and help you get into the property market sooner

Advantages:                  
  • By using a family equity pledge you can borrow up to 100% of the purchase price plus all costs and avoid LMI
  • The guarantee provided by the 3 rd party is limited to a specific dollar amount as opposed to the entire amount borrowed
  • The guarantee can be released at any time as when the primary security can support the loan in its own right, typically at 80% LVR
  • Guarantors can be parents, grandparents or siblings
  • Eligible for the First Home Owners Grant despite guarantors being party to the loan
Disadvantages:
  • The pledge amount is secured by a 1 st or 2 nd Registered mortgage which does limit the available remaining available equity for the 3 rd party
  • Increases to the loan are generally not available
  • Not available for Lo Doc borrowers  


Example

You have purchased an established property in Melbourne for $500,000.  On top of the purchase price, you will need to find another $40,000 in costs and are eligible for the $7,000 FHOG.  This includes stamp duty, transfer of land, title fees, solicitor fees and lenders mortgage insurance. 

Let's assume you need to borrow 95% and will capitalise $10,000 of the mortgage insurance costs to get to 97% maximum lvr.  Your final contribution would be approximately $48,000 of which $25,000 needs to be genuine savings to equal 5% of the purchase price.

So, you need $533,000 in total funds and will borrow $485,000 and have available $48,000 in savings.

With the Family Equity option, you could actually borrow the same amount and not pay any LMI.  In the scenario above, this will save you up to $15,000 in LMI.  Your parents/grandparents/siblings would be limited guarantors as calculated below

LOAN REQUIRED BY BORROWER (97%)                                      $485,000

 TOTAL SECURITY VALUE REQUIRED BY LENDER          $606,250
(LOAN AMOUNT / 80%) multiplied by 100

LESS PURCHASE PRICE OR SECURITY VALUE OF              $500,000
NEW PURCHASE

EQUALS LIMITED GUARANTEE AMOUNT                              $106,250

In this example, by obtaining a security guarantee or pledge over a relative’s property of $106,250, you can avoid mortgage insurance of $15,000 as the overall loan to value ratio is 80%

*In many cases, Family Equity loans are limited to 80% which means a much larger guarantee amount is required however genuine savings are not required as a result with some Lenders.

* Some Lenders will require the guarantor/s to prove serviceability for the amount they are guaranteeing where as other Lenders don’t, so if the guarantor is retired or not working, a loan solution may still be available.


Talk to Puzzle Finance about the range of Family Equity products that are available, as the Lenders who offer such products have varied policies, so it’s important to find the product & policy that is most suitable for your circumstances.