Home Loan Rate – Australia

How can you buy a home without a deposit? In a post-GFC world there are no loans available that will allow you to borrow 100% of the purchase price without providing additional security. In the past it was possible to obtain loans for up to 106% of the purchase price through lenders such as First Permanent, who did not require any additional security for their loans.

In modern times, the only loans that can allow you to borrow 100% are known as guarantor home loans. There are several different types of guarantees, however the most common is known as a family pledge home loan where your parents offer their home as additional security for your loan.

This isn’t as risky as it sounds! The guarantee can be limited to just 25% or less of the loan amount. You can apply for income protection insurance and life insurance to reduce the risk that you will be unable to make the loan repayments. You can also avoid borrowing to your limit which will enable you to have enough spare funds to make additional repayments, and so clear the guarantee as quickly as possible.

What are the benefits for you of using a family pledge mortgage? Firstly you can borrow 100% of the purchase price, or even a little more to cover costs such as stamp duty & solicitors fees. Secondly the approval criteria is less stringent because the lender has more security for their loan. Thirdly you will not be required to pay for expensive Lenders Mortgage Insurance (LMI).

What are the risks to you and the guarantor? The main risk is that if you are unable to make the payments on your home loan then the lender may ask the guarantor to make the repayments for you or may call in the guarantee. In the worst case scenario the lender will try to sell the borrower’s property before trying to sell the guarantors.

We see the main complication of family pledge home loans is generally not when the borrower cannot make the repayments, as this is very rare. The main complication is when the guarantor and borrower have a falling out and the guarantee is required to be removed. In these cases the borrower can apply to remove the guarantee and if they owe over 80% of the property value then they may be required to pay LMI.

Several lenders such as St George Bank, CBA, ANZ, Westpac & NAB all offer this type of loan product. However only St George calls theirs a “family pledge home loan”, the others refer to their loan using different names such as family equity, fast track or deposit kickstart.

Always borrow responsibly and seek legal & financial advice before applying for any type of loan with a guarantee involved.