October 18, 2016
As the median house prices continue to increase year on year in our capital cities we are structuring more and more loans with our first home buyers that involves some form of assistance from parents or family members. This assistance generally comes in two forms, a cash gift or a limited security guarantee.
A gift assistance is great. Note however that the banks will require the family members to sign a declaration confirming the gift is non repayable. A gift is often helpful in fast tracking the minimum deposit amount required.
LIMITED SECURITY GUARANTEE
This option is often misunderstood however is a great assistance tool. A security guarantee can eliminate the need for a deposit to be saved. So how does it work?
Many lenders will allow a related third party to provide additional security to help a family member buy their own home. The person providing this assistance is known as a guarantor. This is different to being a co-applicant or co-signer. A co-applicant will be included on the loan and will be responsible for the entire loan until such time as it is repaid in full. A guarantor, on the other hand, is linked to a loan by a guarantee. This guarantee can be released and the guarantor’s responsibility stopped without the loan being repaid in full.
Borrowers must be able to service the entire loan on their income.
A guarantor allows the equity in his or her own property to be used as additional security for the borrower’s loan. The primary security for the loan will be the borrower’s property. The lender will also take a mortgage over the guarantor’s property. This mortgage will not support the loan directly but will be used to support a guarantee from the guarantor.
Who can be a guarantor?
Guarantors are generally limited to immediate family members. Normally, this would be a parent but guarantors can include siblings and grandparents. Some lenders will allow extended family members to be a guarantor to a loan, but this varies depending on the lender.
How will having a guarantor help the loan application?
Having a guarantor may allow homebuyers who have insufficient deposit, but have the ability to make the required loan repayments, to secure approval to purchase a home. Saving a deposit can be the most daunting aspect for many purchasers and it can be very hard to do when you are also paying rent. By having a guarantor, the borrower may be able to borrow the full purchase price and sometimes even the costs associated with purchasing property. Again this varies across lenders.
Another benefit of having a guarantor is that the borrower may save thousands of dollars by avoiding Lenders Mortgage Insurance (LMI). Generally LMI is required for home loans where the loan is greater than 80% of the value of the property. LMI is a type of insurance which lenders take out to cover the additional risk of high Loan to Value Ratio (LVR) lending.
The amount of the guarantee will depend on the is limited and is dependent on the purchase price and contribution made by the borrower. After the borrower has built up equity in their property, the guarantor can request to be released from the loan. The time frame to achieve this can vary depending on: the original deposit saved, the number of extra repayments made and whether the property has appreciated in value over the time period. At Mortgage Choice Wantirna we conduct an annual review of the home loan with a purpose of releasing the Guarantor as early as possible
What are the implications for the guarantor if the borrower cannot pay back the loan?
Generally the guarantee is limited by value and limited to being security guarantee. This means that lenders will not seek the guarantors to make repayments during the loan term. Instead, a guarantee is only called upon to cover any shortfall if a sale of the borrowers home leaves a residual loan amount.
Loans using Security Guarantees are certainly increasing. Some lenders do these loan types much better than others. I envisage assisting my daughters purchase their first home using a limited security guarantee.
Feel free to give me a call to discuss how this may get you into your home quicker.
Mortgage Choice Wantirna and Surrey Hills
M : 0428 434 084 Office 03 9432 5484