August 28, 2014
When you are close but not quite close enough a third party can assist you with your dream of home ownership. Mortgage broker, John Kennedy of Mortgage Choice in Mudgeeraba, Gold Coast, explains the role of the person providing assistance; the guarantor.
Saving a deposit for a home is often the limiting factor in allowing you to start your journey to home ownership.
A guarantor is a third party involved in the process of securing your home loan. They are not responsible for the entire loan. The guarantor is linked to the loan as a guarantee and can be released from the loan without the loan being paid out in full. They are also only responsible for the amount determined by the bank as to make the initial deposit.
Guarantors are usually required to be immediate family, (e.g. parents, siblings or grandparents). Some lenders will consider extended family but not all.
To be considered for this type of loan you need to meet the requirements of the lender demonstrating you have sufficient means to meet the repayments.
Using a guarantor allows you to exit the rental world and start putting your money into your own asset sooner.
At the moment most lenders require you to have a 20% deposit saved or a smaller deposit and pay lenders mortgage insurance (LMI).
For example, if you have saved $20 000 and wish to purchase a home worth $400 000, you will need a loan of $380 000 and would have a 5% deposit. To go ahead you will be required to pay LMI of approximately $11 600.
With a guarantor the loan is secured by your new home as well as the property of your guarantor and hence the loan of $380 000 for two homes does not require mortgage insurance.
The Why Nots
If you are unable to meet your repayments then the bank will, as per the terms of your loan, take action against you for the funds owed. The lender will also take action against the guarantor for the amount specified in the guarantee documentation.
The guarantor is taking a financial risk and should seek independent legal and financial advice. There will be a mortgage taken against their property to support you.
Also the guarantor’s ability to borrow is reduced as the guarented amount is considered part of their debt.
The Bright side
Once your have paid down the loan to a point where the lender assesses your loan on your property to be 80% of the value of the home (i.e. equal to a 20% deposit) you can release the guarantee. This can happen as you pay down your loan and/or as your property price increases.
A guarantor allows the equity to be used in their home to support the purchase of your home. (Often families do not have large amounts of money to lend but have large amounts of equity in their homes.)
The lender will take a mortgage over the guarantor’s property as well as yours.
The How Much
This is the tricky bit.
If we think of the example above; you have saved a deposit of $20 000 for your dream home with a purchase price of $400 000, then you require a loan of $380 000.
The requirements of the lender is that the amount of $380 000 is equal to 80% of the properties, your property and your guarantor’s property. The guarantor, in this example, would have to have a guarantee of $75 000 made against their home. The value of the property securing the loan is your $400 000 dream home plus a guarantee of $75 000 of your family member’s home.
80% of $475 000 = $380 000.
The total amount that the interest is calculated on is $380 000.
The guarantor loan might be something you would like to consider if you have a small deposit or no deposit at all.
Over the 12 years of working as a mortgage broker, John Kennedy of Mortgage Choice in Mudgeeraba and Robina has helped many people secure their home with the help of their families.
Give John a call on 5559 2563 or send him an email on email@example.com to discuss what the best option for you is.