How a Family Pledge Can Help You Buy an Investment Property Without a Deposit
Saving for a deposit is one of the biggest hurdles for many Australians entering the property market, whether for their first home or an investment property. However, there’s a way to bypass this challenge and fast-track your goals—a family pledge.
While family pledges are often associated with first-home buyers, they can also be used to purchase a first investment property. This strategy allows you to leverage your family’s equity to build wealth through property, even if you haven’t yet accumulated a large deposit.
Here’s how it works, examples to bring it to life, and why it’s a valuable option for first-time investors.
What Is a Family Pledge?
A family pledge allows a family member, typically a parent, to use the equity in their property as security for your loan. Instead of saving a cash deposit, the lender secures part of your loan against your guarantor’s equity, enabling you to borrow the full purchase price of a property—or more.
This arrangement is commonly used for first-home buyers but is equally viable for investment properties. If you’re looking to get into property investing but don’t have a deposit saved, a family pledge could help you start building your portfolio sooner.
How Does It Work for an Investment Property?
When purchasing an investment property with a family pledge:
The Property: The property being purchased is assessed for its rental yield and growth potential, just like any other investment loan.
Your Loan: The lender splits the loan into two parts:
The standard home loan secured against the investment property.
A portion secured against the guarantor’s equity, typically equivalent to 20% of the property value to avoid Lenders Mortgage Insurance (LMI).
Rental Income Consideration: Your ability to service the loan may also factor in projected rental income from the investment property.
This structure lets you invest in property without needing upfront savings for a deposit or additional costs like stamp duty, provided the lender is satisfied with your financial position.
Benefits of Using a Family Pledge for Investment Properties
Start Building Wealth Sooner: Skip the wait to save for a deposit and take advantage of market opportunities.
No LMI Costs: With a family pledge covering the 20% deposit, you avoid paying costly LMI premiums.
Leverage Rental Income: Your investment property could provide rental income to help cover your loan repayments.
Portfolio Building: Getting into the market sooner allows you to start benefiting from capital growth and potentially use equity from the first investment for future purchases.
Example 1: Mark Buys His First Investment Property
Mark, aged 28, is eager to start investing in property but has only saved $15,000—far short of the 20% deposit plus stamp duty for a $500,000 investment property in Perth.
Mark’s parents, who own a $1.5 million home outright, offer $100,000 of their equity as a family pledge.
Mark secures a $500,000 loan, with $400,000 against the investment property and $100,000 backed by his parents’ equity.
The rental income from the property helps Mark meet his loan repayments, and he avoids paying LMI.
Outcome: Mark enters the property market without waiting years to save a deposit, and the investment property begins generating rental income immediately.
Example 2: Sarah Builds Wealth with Family Support
Sarah, 35, has been focused on paying down her mortgage and doesn’t have savings for an investment deposit. She identifies a $700,000 investment property in a high-growth suburb in Sydney.
Sarah’s brother, Ben, offers $140,000 of equity from his property as a family pledge.
Sarah borrows the full $700,000 purchase price, using rental income and her salary to cover repayments.
Ben’s liability as a guarantor is limited to $140,000, ensuring his exposure is capped.
Outcome: Sarah diversifies her wealth into property, and the investment property appreciates in value over the years. As her equity in the investment property grows, Ben’s guarantee is released, freeing him from any liability.
Risks and Considerations for Investment Properties
Using a family pledge for an investment property can be a great strategy, but it comes with risks and considerations:
Market Fluctuations: Property values can go up or down, affecting your ability to refinance and release your guarantor from the pledge.
Loan Serviceability: Rental income may fluctuate, so ensure you can manage repayments even during vacancy periods.
Guarantor’s Risk: Your guarantor’s property is on the line for the guaranteed amount if you default on the loan.
Tax Implications: Investment loans come with tax implications, so seek advice from an accountant or tax professional.
Is a Family Pledge Right for You?
Whether you’re buying your first home or entering the property investment market, a family pledge can provide the boost you need. However, it’s essential to approach this strategy with a clear understanding of the risks, benefits, and long-term goals.
How to Get Started
Speak with a Specialist Broker: We can help assess your situation, identify suitable lenders, and structure a family pledge arrangement tailored to your needs.
Have a Family Discussion: Ensure your guarantor fully understands their role, risks, and obligations.
Seek Professional Advice: Independent legal and financial advice is vital for both you and your guarantor.
Conclusion
A family pledge isn’t just a way to buy your first home - it’s also a powerful tool for entering the property investment market. By leveraging family equity, you can start building wealth sooner, avoid additional costs like LMI, and potentially generate rental income from your investment.
If you’re ready to explore whether a family pledge can help you achieve your property goals, reach out today. With expert guidance, we’ll help you unlock the potential of property ownership and investment.
