No-deposit home loans are on the rise, with parents increasingly looking to support their children on the home buying journey, says regional broker Craig Mowbray.
Family pledge loans (also known as guarantor loans) have come under public scrutiny in recent years, but when explained clearly and transparently, can be an attractive proposition to parents looking to support their children get onto the property ladder, according to a leading regional broker.
Speaking on The Adviser’s Elite Broker podcast, independent mortgage broker Craig Mowbray from Be There Financial Services said he had seen a rise in family pledge loans recently, as parents are happy to do what they can to assist their kids get a leg up in the property market.
“Parents generally do want to see their children get into property, because potentially they’re worried that they’re going to miss that boat,” Mr Mowbray said.
According to the Be There Financial Services broker, the families that typically take out these loans consist of parents supporting their children who have spent many years at university and then enter the workforce into $100,000+ salaries but no savings.
While some banks are still reluctant to offer such a product following ongoing scrutiny from the regulators and banking royal commission, Mr Mowbray believes it is beneficial for parents who wish to see their kids buy property.
“I potentially see that product being a great product for a lot of young people getting into that market, whether it be owner-occupied or investment, because the parents are willing to help,” he said.
The Shellharbour-based broker said he has had success with family pledge loans and has, in some cases, seen parents paid out of their share within three years.
How he structures a family pledge loan
Key to the family pledge loan, Mr Mowbray said, is the ongoing serviceability, which always falls back on the applicant rather than the guarantor.
According to Mr Mowbray, he tends to quote clients “at least 0.75 above the repayments” to ensure that his mortgagors are comfortable paying more than the minimum.
However, he emphasised that a crucial step in writing the family pledge loan is meeting with the guarantors individually.
“Most of the time the first meeting is with the children, and then the second meeting may be with all four [parties]. But then you do have to interviewer the guarantors on their own.”
Mr Mowbray added that he recommends every party involved seek independent legal advice before entering into the agreement.
According to the NSW broker, he recommends that the children pay for the financial advice of their guarantor parents, as a means of showing gratitude for the parents taking on the risk.
Mr Mowbray revealed that he typically structures a family pledge loan (comprising 20-25 per cent of the total loan against the parents’ property) by placing the guarantor side under variable repayments and the vast majority on a two or three-year fixed rate.
“I’ve had some that just want fixed because they want to know their repayments for the next two or three years,” he explained.
“[But] what I often say to clients is… You smash that 20-25 per cent. You absolutely smash it as much as you can [and] you pay the minimum on your 80 per cent.”
Using this method of debt reduction, and by reviewing the loan every six to 12 months, Mr Mowbray said he is often able to transition the guarantor loan solely to the applicants quickly.
According to Mr Mowbray, this structure has often resulted in guarantors being paid out of their portion of the loan before the fixed term expires.