Using Parental Support Strategically: Family Pledge Loans and Guarantees

For many Australians, saving for a home deposit remains one of the most challenging steps in purchasing a property. With house prices continuing to rise, more families are exploring ways to support the next generation in overcoming this financial hurdle. One increasingly popular solution is the family pledge loan, also known as a guarantor loan. 

What Is a Family Pledge Loan?

A family pledge loan allows parents (or close family members) to help their child buy a home by using the equity in their own property as security for the loan. Rather than gifting money for a deposit, the guarantor offers part of their home’s equity as a form of guarantee. This means the borrower may not need to save a full 20% deposit. 

How It Works

With a family pledge loan, the guarantee typically covers the deposit or enough to avoid lenders mortgage insurance (LMI). This can make a substantial difference to the upfront costs of buying a home. The main loan remains in the borrower’s name, while the guarantor only takes responsibility for the guaranteed portion. 

Benefits of Using Parental Support

1. Faster Market Entry: Saving a large deposit can take years, particularly for buyers in Sydney, Melbourne, or Brisbane. A family pledge loan can allow buyers to purchase a home much sooner.
2. Avoiding LMI: Borrowers who have less than a 20% deposit usually pay LMI, which can cost thousands. A guarantor can help avoid this expense.
3. Better Loan Terms: With a stronger financial position at the outset, borrowers may gain access to more favourable interest rates or loan features.
4. No Cash Transfer Needed: Parents don’t need to gift money - they can simply use equity they already hold.

Key Considerations for Families

While family pledge loans can offer significant advantages, they also come with responsibilities:

• Shared Risk: If the borrower defaults on the loan, the guarantor may be liable for the amount they guaranteed. It is essential that all parties understand the risks involved.
• Limited Guarantee Options: Many lenders allow guarantors to only secure the deposit portion of the loan, not the entire amount. This helps to limit exposure.
• Exit Strategies: Over time, as the borrower builds equity in their home, the guarantee can often be removed. This typically happens once the loan-to-value ratio (LVR) drops below 80%.

Is a Family Pledge Loan Right for You?

These loans can be a powerful way for families to work together towards home ownership, but they are not suitable for everyone. Borrowers and guarantors should consider independent legal and financial advice before proceeding. It’s also important to discuss expectations and exit strategies clearly from the outset. 

Conclusion

In a market where saving for a home deposit is increasingly difficult, family pledge loans are helping more Australians turn their home ownership goals into reality. By using equity instead of cash, families can provide meaningful support without giving away savings. If you’re exploring ways to enter the market sooner or want to understand how guarantor options might help, speak with one of our trusted mortgage broker who can guide you through the available options.