May 14, 2017 by Shae Aiello
With today’s increasingly high property prices, it can sometimes be hard for First Home Buyers to get into their own home. This is where you may need help from a Guarantor.
What is a Guarantor?
A Guarantor is a third party to your home loan, helping you to buy your own home by providing additional security. This comes in the form of a guarantee.
Who can be a Guarantor?
This can vary from to lender to lender, but generally, Guarantors are limited to spouses or immediate family members, including parents, siblings and grandparents.
What is a guarantee?
A Guarantor is linked to a loan by a guarantee, which can vary in amount or percentage depending on individual lender policies. The guarantee takes the form of a Security Guarantee - where the Guarantor agrees to let the loan be secured against their property as well as the property being purchased.
What are the benefits of having a Guarantor?
- You may need to save up less deposit - by having a Guarantor you may be able to borrow the full purchase price and sometimes even the costs associated with purchasing property. This varies across lenders - some will still insist that you contribute some of your own equity towards the purchase, even if you have a Guarantor.
- You might be able to avoid Lenders Mortgage Insurance (LMI) - LMI is an insurance that the lender takes out when you are borrowing more than 80% of the property’s value (Loan to Value Ratio or LVR). If your Guarantor is willing to use the equity in their own property as additional security, the LVR would reduce and help remove the need for LMI.
What if my Guarantor still has their own mortgage?
Generally speaking, this shouldn’t be a problem as long as your Guarantor has built up enough equity of their own.
There are some lenders though that may require for all loans to be with the same lender.
In some instances, the Guarantors borrowing capacity could possibly be affected if they are planning on taking out a new loan in the future.
What happens to the Guarantor if I can’t pay back my loan?
If you are unable to pay back your loan, your lender can take legal action against you, and in some circumstances, your Guarantor as well.
Your Guarantor will be liable for the amount specified in your guarantee.
How do we remove the guarantee?
After you have built up equity in your property, you can arrange for your Guarantor to be released from the loan. There may be some additional fees involved in doing this, depending on the lender.
