If you want to buy your own home but don’t have enough deposit, a guarantor can help you obtain finance, and your new home, by offering additional security support.
At Mortgage Choice Ashgrove we see this option increasing with our clients every month, as it becomes harder and harder for buyers to get into the property market.
Who can be your Guarantor
Your immediate family members, such as parents or your spouse can be your Guarantor. Some lenders will allow siblings, grandparents, extended family members and even ex-spouses.
How do they qualify to be your Guarantor?
They need to have equity in a property and be willing to provide it as additional security for the purchase of your property.
You will still need to be able to service the entire loan on your income.
How your loan will affect the Guarantor:
The Guarantor’s ability to borrow will be reduced after they agree to act as guarantor.
They will need to seek independent legal and financial advice before accepting the role.
They may be liable for the loan debt if you default on your repayments.
The difference between a guarantor and a co-applicant or co-signer:
Co-applicant/co-signers are included on the loan and are responsible for the entire loan until it is paid in full.
Guarantors are linked to the loan by guarantee of equity in their property. This guarantee can be released without the loan being repaid in full. If the guarantee is released, the guarantor’s responsibility for the loan debt is also released.
How the Guarantee of Equity is used:
- Primary security - The property you are buying will be the primary security for the loan.
- Additional security - The equity in the Guarantor’s property is used as additional security for your loan. The lender takes out a second mortgage over the guarantor’s property, which is used to support the guarantee from the guarantor. This second mortgage however will not support the loan directly.
What happens if you can’t pay back the loan:
- Legal action: In some circumstances, the lender is able to take legal action against you and the guarantor, if you are unable to pay back the loan according to the terms of the contract.
- Guarantor is liable: The Guarantor is liable only for the amount specified in the guarantee.
How a Guarantor help your application process:
If you wish to purchase a home, have the ability to make the required loan repayments, but have insufficient deposit, having a guarantor may allow you to secure additional funds.
With a guarantor, you may be able to:
- Borrow the full purchase price and costs associated with the purchase. This option varies among lenders, and some will still insist that you contribute some savings (or equity) towards the purchase, but it avoids the hardest part of buying a property - Saving a deposit.
- Save thousands of dollars by avoiding Lenders Mortgage Insurance (LMI). LMI is a type of insurance that covers the lender against the borrower defaulting on the loan. It has no benefit to you, the borrower, whatsoever, but you pay their premium. It is required on home loans where the loan is greater than 80% of the value of the property.
You want to purchase a home for $400, 000. The costs associated with buying the property are around $20,000 conservatively, so you need $420,000 in total. You have $40,000 as a deposit, so will need to borrow $380,000 to buy the home.
This $380,000 loan is 95% of the value of the property (meaning the Loan to Value Ratio (LVR) is 95%). At 95% LVR you will be up for $11,600 in Lender’s Mortgage Insurance (LMI) costs. To avoid paying this LMI, which basically is dead money for you, your loan needs to be under 80% of the value of the property - so a loan of only $320,000. You would need an extra $60,000, or perhaps another 5 years to save!
Your Guarantor could instead provide you with a guarantee for the additional $60,000 to avoid you paying the lender that $11,600 extra cost to cover LMI.
How much does the guarantee need to be?
The lender’s policy determines the amount of the guarantee. It 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).
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.
You may be required to pay some additional fees at the time of a request to release the guarantor, depending on the lender. This can include a fee for the lender to revalue the primary security property as well as lender discharge fees.
How long does it take to build up equity?
Building equity can vary depending on:
- How much you contributed as a savings deposit,
- How many extra repayments you made,
- If the property has appreciated in value over the time period.
Are you thinking of using a Guarantor to buy a property?
Talk to your Mortgage Broker - Stuart Pullar, from Mortgage Choice Ashgrove today.
Stuart will determine how much you can save by using a Guarantor.
If you decide to approach a family member about them becoming your Guarantor, or you have already discussed the idea with them, Stuart can meet with you all together to go over how it works for each party involved. He will educate you on the entire process, if you need him to.
From there, the team at Mortgage Choice Ashgrove can take you through the loan process from start to finish.
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 what are you waiting for?
Call Stuart Pullar and the team at Mortgage Choice Ashgrove today on
07 3366 9982 , mobile 0414 408 535 or email him at firstname.lastname@example.org
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