Guarantors - are they an option?

October 30, 2017
Lisa Elliott

Saving for a deposit is hard work and can take many months and sometimes years.  Lenders have a minimum deposit requirement, however depending on the property and the lender, there is a chance that the hard saved deposit funds could fall short once other purchasing costs are factored in.

A possible solution may be to ask a family member to act as guarantor.  Normally, guarantors are limited to immediate family members but some lenders will allow siblings and grandparents.   

Having a guarantor may help those with a low deposit, but who have the ability to make the required loan repayments, secure additional funds to purchase a property.

Having a guarantor may allow a borrower to borrow the full purchase price and, in some cases, the additional costs associated with property purchase.   

Using a guarantor may negate the need for Lenders Mortgage Insurance (LMI). LMI can add many thousands of dollars to the cost of purchasing a home and is typically required for home loans where the loan is greater than 80% of the value of the property.

How does it work?

A  guarantor agrees to use the equity in their own property as additional security for the borrowers loan. The lender takes a mortgage over the guarantors property, and the guarantor is linked to the borrowers loan by a guarantee.  

The primary security for the borrowers loan is the borrowers property. The borrower must be able to show they can service the entire loan on their income. 

The guarantee can be released when the loan is repaid in full, or more typically when the lender agrees the borrower has sufficient equity in the property to enable the release of the guarantee.  Depending on the lender there may be additional fees to release a guarantor, which could include costs to revalue the property and any discharge fees. 

Important things to note

Lender policy will determine the amount of the guarantee and the amount of the loan they will provide.

If the borrower is unable to pay back the loan, the lender can take legal action against the borrower, and in some circumstances, the guarantor.   The guarantor will be liable for the amount specified in the guarantee. 

The guarantors ability to borrow will be reduced after they have agreed to act as a guarantor.

Anyone who is considering becoming a guarantor is advised to seek independant legal and financial advice before agreeing to accept the role.  Most lenders will insist on this, prior to accepting a guarantee.

Posted in: First home buyers

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