What Is A Family Pledge Guarantor Loan? (Ep81) - YouTube

I get a lot of questions from home buyers or investors about how they can take advantage

of these family pledge guarantor loans or how they can go ahead and purchase a property

without a deposit or without their proven savings.

Today I sit down with Brad from oceanhomeloan.comau and we talk about what exactly is a family

pledge guarantor loan, what are the benefits, and you're putting up the guarantee them what

are your rates/risks and what happens in worst case scenarios?

So let's go over to the video and if you want more videos, articles and podcast like this

one you can find them all at PositiveCashflowAustarlia.com.au.

Now over to the interview with Brad.

Ryan: Guarantor loans or family pledged lines as they're also known..

Brad: Yes, family pledge, family guarantor, guarantors support...

Ryan: ...no deposit loans?

Brad: Yes, it can be referred to as no deposit home loan because you don�t have to come

up with any fund yourself.

The concept of it is exactly that is to allow people who do not have a deposit or sufficient

savings on deposit to be out there to purchase a property with the support of a family member.

Majority of lenders will keep this to either parents and siblings- brothers, sisters, in

some cases grandparents.

They tend not to start with aunts, uncles and that far away.

Traditional standard is parents assisting their children getting their property.

Ryan: It wouldn't necessarily be that, you could do it with your friends or something

like that?

Brad: There are possibilities to that but it's quite restricted.

More than likely, if you are doing it with friends you're doing something jointly as

opposed to this is your own property.

Where people probably think they understand the concept is probably from their parents

age where their parents might grow* guarantor loan on along with them.

But that meant they are on the title and the mortgage as well.

This is a completely separate structured product where the children are the only people on

the mortgage and the title.

It's still in titles ***** relative states or boost like Queensland if you're constructing.

They would have been prohibited before, because of the parents who own the property would

have been on the titles, therefore there was no first time buys.

Ryan: With this family pledge loans, assuming we're doing it the simplest way which is parents

offering us the security, how does it go, because I know in the past used to be full

security but now there is a lot of lenders offering just partial security?

Brad: Yes, partial security, limited security.

It's a mathematical equation really, but a simple one.

The most popular method of doing this is to avoid paying mortgage insurance.

With lenders mortgage insurance the premium is charged when you bought out more than 80%

of the value of the property.

Ryan: And that's the charge that the person buying the property pays because they don't

have a large enough deposit, it doesn't really go towards anything apart from ensuring the

bank against you because you're at higher risk because you have to deposit?

Brad: Correct, and if you would be fall* on the loan then they would be pulling insurance

policy if there is a short form on the side or sell property.

The traditional method or the standard method is to support 20 %. To be on to achieve a

20% deposit on $400, 000 property, we would need $500,000 property for a $400,000 loan.

So you were buying for $400, 000 you need $500,000 to make that 80 % of that $500,000;

the parents limit being guaranteed to $100,000.

Ryan: If you're purchasing a property then you think you are you getting a loan for 100

% of the property.

So let's use the $500, 000 example.

You're getting a loan to $500,000 which the security against the property.

A hundred thousand dollars of that which is you 20 % is also secure against the parents

home, or if you have cash, I've heard that you can save your security in your bank account?

Hey guys I just wanted to quickly clarify how the security is calculated when you doing

the guarantor loan because I think what I said was inaccurate in the video and so I

just wanted to make a completely clear.

The way that works with the traditional loan is basically let's a have a $500, 000 property.

The bank's going to look for 20 % deposit, which is $100, 000 and so then your mortgage,

would be $400, 000.

But when you're looking at security with the family guarantor loan it's not going to work

in exactly the same way.

The bank isn't looking for $400, 000 in security or equivalent of 20% deposit.

What the bank is doing is actually increasing the value of the debt security to make a 80

% loan value ratio.

Let me explain this in numbers because I find that the easiest way to do it.

Let's say we have a $500, 000 property, well that $500, 000 is secured against your home,

let's say you're the person borrowing it.

So therefore that's a 100% LVR.

And now what the bank is going to do is then add security on top of that in order to get

that loan value ratio down to 80 % so rather than lowering the loan amount because of the

apparent security- they are actually adding that security on top.

The way to do it is to take your loan amount, let's say %500, 000 and we're going to divide

it by 80 because it's going to count the 80 %. So 500,000 divided by 80, that gives us

the value 1% and that is $6, 250.

What we do is then times by 100 to give us the full 100% and that's going to equal $625,

000.

So we're looking at a $500, 000 property, if I'm the person buying and my parents are

guarantors then I've got a debt security of $5, 000 against my own property and then we

need to reach that $625, 000 so my parents are going to have to add security of a $125,

000 to that.

That brings the loan to value ratio down to 80%.

It's a little bit confusing, if you understand math really well then obviously it's going

to make sense to you, if you don't then go ahead, speak to your mortgage broker or speak

to your bank or your lender about this.

But basically divide by 80 whatever the purchase price for the loan amount is and then times

by a hundred.

So divide by 80, gives you 1%, times 100 gives you the full amount and then you minus your

loan amount from that and that gives you the amount that your parents need to guarantor.

I hope that makes more sense, I hope that I explained it better, and now back to the

interview with Brad.

Brad: Yes, you can security against the turn* deposit in the bank.

Ryan: But not many people would do that I would imagine?

Brad: Not with interest rates as low as they are today, you would be going backwards with

inflation of 2%, turn of deposit rights wouldn't be much more so it wouldn�t be the wisest

thing in the world.

Ryan: Let's say we go ahead with this and we get the loan and the security.

The portion security, which is against out parent�s property.

How do we then go about removing that security in the future?

Is there a process to remove that?

Brad: It�s not an automatic process, it's a process that has to be requested, you get

back to your mortgage broker, he will assist you with it.

The guarantee can be removed any time, normally we would wait until you have 20% of equity

in the property, you've paid the loan down substantially over period of time, may had

an increasing in property prices which means that the loan is now down to 80 %. Technically,

it can be removed any time as it meets bank policy for their maximum long evaluation ratio.

So if you're prepared in the future to pay a mortgage insurance premium so your LVR is

now 85 and you want to make sure your parents(if they are retired now) just don't want to guarantee

there anymore you can pay them the insurance policy- mortgage insurance premium and the

bank will release the guaranty.

Ryan: You might be, I don't know that, you might be getting into the property without

a deposit using the guarantee but then you may go up in value a bit but not enough to

get to that 80% loan to value ratio but we can still remove them as long as you're happy

to pay the lenders mortgage insurance that's applicable and it is a process that you are

going have to go through and request through mortgage broker or through your lender.

If the property goes up even if you get a new evaluation done they are not just going

to remove the security unless you go through the credit process to have it removed?

Brad: Exactly.

Ryan: And is there anything else that people should know about these family pledged loans

or these no deposit loans or whatever that they are being called?

Brad: I think that one essential thing is that there is a split between a few of the

lenders, the parents should take legal advice.

I know they do it for the love of their children but it is a large financial commitment so

you should be completely aware of what your obligations are.

You are having mortgage in your property, it can also still be done if you have a mortgage

with another Bank, the new lender would take second mortgage behind that one as long as

you have sufficient equity.

I think you should take legal and financial advice.

Ryan: So if things go pear shape which we obviously hope they don�t, then you know

the legal repercussions, you know what's going to happen and so hopefully your relationship

with your children is therefore protected.

Do we see many situations where it does go peered shaped, I'm sure there is some?

Brad: Not in my experience but yes there's going to be a position where I would suggest

that more than likely the children's property will have to be solved* it's to keep something

to go wrong.

There is other situation where we as mortgage brokers we insist that you are aware at least

this, you make sure you get your income protection your mortgage insurance protection your loft

insurance those are the things that are more likely to cause the issue then maybe losing

a job.

Ryan: It's more likely something unfortunate that has occurred in circumstances that..

Brad: That is out of your control, if the parents supported you in this way maybe if

one of you loses job for three months the chances are they will be able to help you

if they've got that sort of equity they might help you out, you will get new job anyway.

So planning for the future is... having a backup plan is not bad idea either, just making

sure, because you can obviously afford a loan.

Ryan: You can afford to pay for it you just don't have the deposit behind you.

Brad: Protect yourself, make sure you get your income protected, specially when you

are young, at that age, long-term super inundation will bill both go in another way for long

term.

At early age it's your income that you need to protect and that will get you, if your

property is your feel of where you want to invest and grow wealth from, make sure you

protect your income so you can.

Ryan: So you can afford to pay for your portfolio and you can if you want to continue forward.

The last question around these family pledge loans is "let's consider we�re in a worst-case

scenario, what would happen with the bank's first sell the investment property or the

child's property and then if the loan was fully paid off because of that, would they

just release the parents?"

Brad: Right.

Say that the pledges are of your own property, not from investing.

You can live on the property for 12 months and the move out.

If the bank gets their money back, all mortgages are released and if the bank does not get

the full amount back then there is a mortgage on the parents property and they will be requesting

that funds.

If the parents have any savings it can be paid and if the parents have small amount

they might be able to pay that mortgage all by themselves.

Ryan: OK, so worst-case scenario, because I imagine there is a lot of parents out there

thinking, what's the worse-case scenario, just so they know?

So let's say the property is sold 1 that the child was in and it didn't cover the mortgage

1 the parents would then have the option because it's a mortgage on their 1 property 1 they

can continue to pay that mortgage until it was paid off.

They wouldn't necessarily have to go ahead and sell their property straight away?

Brad: Correct but...

Ryan: I guess it would vary from lender to lender so obviously, always check with your

lender.

Brad: and also with the time, the amount that�s remaining then is basically mortgage securities

against the repair* of the property but then the parents would actually have to apply to

pay that mortgage, like a normal loan application because it's not them who had the previous

mortgage.

It's just that the securities has been given so if they're retired and can't get service

a loan, no bank is going to do much about that anyway.

But a let's say they have a lot ****** then it would need to be very much looked into.

Ryan: So you would need to apply to process or put in an application to get that mortgage

for yourself as a parent to begin paying it, it wouldn't be just automatically assigned

to you because the mortgage is not assigned to you, it's assigned to your children so

therefore there's I guess a change of hands.

Brad: The mortgage is actually being discharged if you've sold the property.

There is actually no mortgage, there is just a debt secured on the parents property which

then needs to be...

Ryan: So they need apply for a mortgage to cover that debt.

It�s good to know that worst case scenario isn't necessarily your home is going to be

sold automatically but obviously if you are retired and you don't have any income coming

in then you need to consider the fact that if things do go very per shaped which is rare

in your circumstances, then you need to think about what that could mean for you.

Brad: The thing about it is that banks will not take on the family pledge from the parent

who is heavily financially committed anyway is, they have to have quite a lot of equity.

Ryan: And the best thing would be to speak to your mortgage broker about whether you

can actually do a family pledge and whether you will be approved for it because again,

like Brad can look at 30 different lenders and say who does and who doesn't rather that

you just going into your bank and they say well we can't service you but someone else

might be able to.

Brad: Yes exactly, not all lenders do it.

Ryan: All right, I thank you for covering that because it is a topic that I get a lot

of questions about and if you want to ask Brad some more questions about that then set

up meeting with him then you can go to oceanhomeloans.com.au.

If you liked what Brad had to say and you want to get his expertise for your specific

situation you can get in contact with him through his website over at oceanhomeloans.com.au.

As a mortgage broker he services clients all over the country he is located on the Gold

Coast but he does deal with people in all cities and all states so you can check him

out, his blog is updated on a regular basis and I do think that it is a valuable resource

that you should go and read and see if you can pull any valuable information from.

So again that oceanhomeloans.com.au.

If you want my full list of mortgage brokers and you want to look for the one that's closest

to you or you want to look at a variety brokers then head over to positivecashflowAustralia.com.au/brokers

and you can check out a list there.

Until next time which is tomorrow because we release a daily podcast and video, stay

positive!