July 06, 2016
What is a Guarantor?
There are many lenders who allow a related third party to add further security to help their family member purchase their own home. The person who provides this assistance is called a guarantor.
A guarantor is different to a co-applicant or co-signer. A co-applicant is actually included on the loan and is responsible for the entire loan until it is repaid in full. Whereas, a guarantor is connected to a loan through a guarantee. This guarantee is able to be released and the guarantor's responsibility ceased without the loan having been repaid in full.
However, this can typically only happen if the borrowers are able to service the entire home loan on their own income.
How does a Guarantor loan work?
A guarantor permits the equity in their own property to be used as an added security measure for the borrower's loan. The primary security for the home loan will be the borrower's property. The lender also takes out a mortgage over the guarantor's home. But, this mortgage does not support the loan directly but is used to support a guarantee from the guarantor.
Who can act as Guarantor?
Typically, guarantors are limited to immediate family members such as a parent, however, it can also include siblings and grandparents. There are some lenders who will let extended family members and even ex-spouses to act as guarantor to a loan, but this will depend on the lender.
How does having a guarantor help the loan application?
By having a guarantor it may allow borrowers who don't have a big enough deposit - but are able to make the required loan repayments - to borrow additional funds to purchase their dream home.
Many find it difficult and sometimes overwhelming to save for a deposit, especially when they are also paying rent. By having a guarantor, it may allow the borrower to borrow the full purchase price and sometimes even the associated costs with purchasing a property. But again, this does vary depending on the lender and some lenders will require borrowers to contribute some of their own equity towards the property purchase, even if they have a guarantor.
Another benefit of using a guarantor is that it could potentially save the borrower thousands of dollars by avoiding Lenders Mortgage Insurance (LMI). Typically LMI is added for home loans where the loan amount is more than 80% of the value of the property. LMI is a type of insurance which lenders use to cover the increased risk of high Loan to Value Ratio (LVR) lending. Even though this insurance protects the lender from the borrower defaulting on the home loan - the borrower has to pay the premium.
Once the borrower has built up some equity in their property, the guarantor can seek to be released from the loan. However, the time frame for this will vary depending on; the initial deposit saved, the amount of additional repayments made and whether the property has appreciated in value since the initial purchase.
It's important to note that some lenders may require the borrower to pay some extra fees when the guarantor seeks to be released from the loan. This may involve lender discharge fees as well as fees for the lender to revalue the primary security property.
What are the consequences for the guarantor if the borrower defaults on the loan?
If the borrower cannot pay back the loan in accordance with the terms of the contract, the lender can take legal action against the borrower, and in some cases, the guarantor also. In these cases, the guarantor would be liable for the amount detailed in the guarantee.
For any questions related to having a guarantor, or being a guarantor - don't hesitate to call me today at Mortgage Choice in Blackwood & Mitcham on (08) 8178 0700 to chat about your options.
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