No Deposit Loans can be a number of different products, including but no limited to:- Kick Start / Parental Pledge / Guarantor / Family Guarantee/ Family Pledge Loans
They are all designed to help:-
- Children/Borrowers who want to get into the property market but whatever reason have no deposit.
- Parents who would like to help their children into the property market, but do not have the cash at hand to assist with a deposit.
- Reduce or eliminate the Lenders Mortgage Insurance (LMI) the borrower would normally incur if having to borrow more than 80% of the value of the property.
There are slight differences in policies and procedures between Lenders, however, they all generally use the equity in the parent’s property as security allowing the children to borrow 100% of the purchase price of the property plus cost; ie Stamp Duty.
All Lenders will have slightly different procedures for clients with no deposit, so please refer to this document as a guide only.
To Qualify
Parents/Guarantors must have sufficient equity in their property. For example, the amount the parents/guarantors owe cannot be more the 80% of the value of their property. Properties can include investment properties, but there are some limitations for different lenders.
The parents/guarantors must be able to show ability to continually repay/service their current repayments.
The child/borrower must be able to show ability to repay/service the total amount of the loan. Lenders will NOT take into consideration parents/guarantors support to repay/service the loan.
The Process
The process is like a normal loan application however due to the involvement of the parents/guarantors property, they will need to provide supporting documents and be involved in the process as well.
Different Lenders will have different processes, however once decided on a Lender, it is best to talk specifically with your Broker about the process involved.
The general process:
- Lender will grant a loan to the child/borrower up to 80% of the value of the property purchased.
- The remaining balance of the purchase price and other costs (ie Stamp Duty) is made up of security taken over the parent’s/guarantor property. In most cases Lenders will require both the parents and guarantor to remain with them (ie same bank). However there are some that will allow the parents/guarantors to remain with their current Lender as long as their current Lender allows for a second mortgage to be registered on the title of the property used as security.
- The full amount of the loan is then in the child’s/borrower’s name and it is their responsibility to repay/service the loan.
The Risk
Like with all borrowing, there are risks and we always suggest that parties get their own advice in relation to these loans to ensure they understand the circumstances.
The main concern we hear is what happens to the parent’s/guarantor’s property if the child/borrower fails to repay the no deposit loan? Again each lender will act slightly differently, however in general terms:-
- Lenders these days will work with the child/borrower to see what they can do to assist the client with the repayments.
- If a solution is unable to be reached, the Lender will force a sale of the property to recover monies owed.
- If the sale fails to recover the full amount owing to the lender, the lender will approach to parents/guarantor for the balance. This does not necessarily mean forcing the parents/guarantor to sell their property. The parents/guarantor may have the ability to pay the balance in cash or other means such as refinancing their current debt.
To reduce these risks, we encourage both borrower and guarantor to seek independent advice and to consider mortgage protection to cover both parties to an extent. We also encourage talking to your Broker about structuring the loans so that the parents/guarantors are ‘freed’ from the loan as soon as possible.
