Can you buy your home or investment property with a $0 deposit loan?
Yes you can. And it’s one of the hidden gems of the property industry.
The banks have various names for this, but it is commonly known as a family guarantee loan or a family pledge loan.
Extended family members like grandparents can help, but for this example let’s assume it’s parents and a child.
It works like this; Mandeep graduated from university two years ago, he has a well paid secure job and has saved $20,000.
Mandeep is keen to buy an investment property but is years away from having a big enough deposit. His parents Sarah and Naveen own a home with lots of equity and are willing to help him enter the property market.
Mandeep finds an investment property for $400,000 (a loan of $420,000 including costs is needed).
The bank will lend him 80% against the property value, $320,000.
This means he needs $80,000 as a deposit plus $20,000 for buying costs, a total deposit of $100,000.
His parents allow the bank to use $125,000 of the equity in their home as security.
The bank treats this equity like a separate property and Mandeep borrows 80% against it. 80% of $125,000 is $100,000, which is the amount required as a deposit.
He borrows $320,000 against the new property and $100,000 against his parents’ property. This gives him the $420,000 he needs in total.
He can keep his $20,000 in cash as emergency funds.
Besides Mandeep entering the property market years sooner there are other great aspects of this loan. The family pledge can be released as soon as Mandeep has more than 20% equity in his property.
For example, fast forward a few years and the property is now worth $440,000.
Mandeep has paid the loan down to $350,000. 80% of $440,000 is $352,000, so his mortgage is less than 80% of his property value and the bank will now release the family pledge if requested.
Mandeep’s parents can use the equity for themselves, another family member or he can buy a second investment property.
You can see how this strategy lets Mandeep enter the property market years sooner than he otherwise would.
I also like the fact that Mandeep must qualify for the loan in his own right as the bank does not use his parent’s income.
Remember, Mandeep doesn’t owe his parents any money, he owes it to the bank. Otherwise, he may borrow $120,000 from his parents and $300,000 from the bank. He might owe his parents for 10-15 years and tie up equity his parents might need for themselves.
A family guarantee loan avoids all this potential drama. If the bank won’t lend him the $420,000, he will need to buy a cheaper property or save until he qualifies for the amount he wants to borrow.
As I mentioned earlier each bank has their own version of this loan and their own rules and regulations so you will need to do further investigation to identify the loan which is best for you. If you need help, Better Homes and Gardens Home Loans can assist. email support.richmond@bhgre.com.au for more information.
The author Michael Sloan is an Investment Property Specialist, you can contact him on 0417 577 597. https://www.bhgre.com.au/office/richmond/agent/michael-sloan/50019
Disclaimer: The opinions posted within this blog are those of the writer and do not necessarily reflect the views of Better Homes and Gardens® Real Estate, others employed by Better Homes and Gardens® Real Estate or the organisations with which the network is affiliated. The author takes full responsibility for his opinions and does not hold Better Homes and Gardens® Real Estate or any third party responsible for anything in the posted content. The author freely admits that his views may not be the same as those of his colleagues, or third parties associated with the Better Homes and Gardens® Real Estate network.