April 18, 2016
When you are trying to buy your first home in today’s pricey property market, saving a large enough deposit can seem like an impossible feat. If you have the ability to make the required loan repayments, using a guarantor to provide additional security against their property may help you secure additional funds and get your foot in the door sooner, without needing as much cash up front.
The option of using a guarantor is one of the most popular ways now for first home buyers in particular to get into the property market.
Often parents want to help their children buy their first home by way of a lump sum cash payment or even a gift. However that cash is often difficult for mum and dad to come up with too, so an alternative is to use equity from their home instead.
The idea of a guarantor seems simple enough, but the process itself needs to be completely understood by all parties involved before you jump in. It can be tricky, and each lender has different criteria for guarantors to meet, some of which are outlined below.
Who can be your Guarantor:
Parents, your spouse, or immediate family members can be your Guarantor. Depending on the lender, grandparents, extended family members, siblings and even ex-spouses may also be considered, and some lenders will even consider anyone you can convince to sign the documents.
To qualify to be your guarantor, your family member must have equity in a property that they are willing and able to use as additional security to go with the property you want to buy.
The amount of the guarantee can vary from the full loan amount to as little as 20% of the loan (where the loan is for 100% of the purchase price), depending on the lender.
Some lenders will also need the guarantor to show they can service the debt.
The benefits of using a Guarantor:
Rather than going it alone, if you use a guarantor you may be able to:
- Borrow up to the full purchase price of your new home, plus the costs associated with the purchase. Meaning your requirements for a deposit may be minimised.
- Avoid Lenders Mortgage Insurance – which is a type of insurance that covers the lender if the borrower defaults on the loan, and is required to be paid if you need to borrow above 80% of the value of the property. It is of no benefit to the borrower at all. You basically are paying the lender’s insurance premium for giving you a loan. If you can avoid this fee by using a guarantor, this ultimately could save you thousands.
- Some lenders will consider using a guarantor for debt consolidation on a case by case basis.
Guarantors making loan repayments:
Your guarantor does not help you pay for, or service your loan. You will still need to do that on your own via your income. Guarantors are usually only linked to the loan by this guarantee of equity in their property. This guarantee can be released without the loan being re-paid in full, which then releases the guarantor’s responsibility for the loan debt. It is important to not though, that some lenders will ask the guarantors to show they could service or repay their guarantee.
A guarantor helping with repayments as well as equity:
If you can’t service your loan on your own income, you may need your family member to not just be a guarantor, but to go in on the loan itself with you as a co-applicant or co-borrower.
If they do become a co-applicant or co-borrower, they will then become responsible for the entire loan until it is paid in full, just as you would be.
The Guarantee of Equity, what it is:
The property you are buying is the primary security for the loan.
The security, or equity that the Guarantor provides via their property is used as additional security for the loan, this is the Guarantee of Equity. The lender takes out a second mortgage over the guarantor’s property, which is used to support the guarantee of equity that the guarantor is providing. For example, if you need a $50-$100K equity guarantee from mum and dad to buy your home, then the second mortgage against mum and dad’s property is only for that $50-$100K equity guarantee. It won’t actually support your loan directly. It is important to note that some lenders will not take a guarantee of the owner occupied property, and the lender will always need to make sure the guarantor’s property is an acceptable security.
How your loan affects the Guarantor:
In most cases, even though your guarantor may not be affected by your loan repayment obligation directly, if your guarantor decides to borrow against their own property to buy something for themselves for example, then the equity they have used as a guarantee may be taken into consideration, and may reduce their ability to borrow.
As mentioned earlier, some lenders will need the guarantor to show they can service the debt as they may also be liable for the loan debt if you default on your loan repayments. It's best to speak with your broker in detail about these requirements, as each lender varies.
Anyone considering taking on the role of guarantor must seek independent legal and financial advice, before they take on the risk.
What happens if you default and can’t pay back the loan:
The Guarantor is usually liable only for the amount specified in the guarantee. So if they have guaranteed $50-$100K, then this may be all they are liable for. In some cases, if you cannot repay your loan, lenders may take legal action against you and the guarantor. Again, each lender is different, so your broker will go over these requirements on a case by case basis with you.
When the Guarantor can be released:
You can request that your Guarantor be released from the loan, once you have built up equity in your property through means such as additional loan repayments, or property value increases. Usually this is when your loan to value ratio (LVR) gets to below 90%, but lenders may consider this on a case by case basis. The bottom line is, you don’t have to pay off the loan in full before you can release the Guarantor.
How do you get started?
This is where it is easier to get your Mortgage Choice mortgage broker (Daniel Meade) to crunch the numbers for you and go through each lender's requirements in terms of the guarantor.
It depends on your cash deposit available, how much you want to spend on a property, how much you can borrow and lots of other factors. Rather than going into complex examples, give Daniel Meade – Mortgage Choice, your home loan expert in North Brisbane a call and he can determine for you how much you can save by using a guarantor for your specific circumstances.
If you are thinking of approaching a family member about them becoming your Guarantor, or you have already discussed the idea with them, Daniel can meet with you all together, or separately if preferred, to go over how it works for each party involved. Daniel will educate you on the entire process, if required, and guide you through the application process. Please note, you will be required to seek independent financial and legal advice as part of the application process, but we can certainly get you started.
As time goes on, when you are in a position where you would like to release your Guarantor, we’ll be ready and waiting to assist you with that process as well.
So are you ready to get your guarantee going today?
Or, for further information on this or any other topic, please contact your mobile Mortgage Choice broker,
Phone 07 3833 9666,
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Daniel is looking forward to helping you with your home loan options today. Thanks for reading our blog.
This article is for general information purposes only and does not constitute specialist advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. It has been prepared without considering your objectives, financial situation or needs. You should, before acting on the advice, consider its appropriateness to your circumstances, and specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy.