Guarantors - Explained

What is a guarantor?
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.

How does it work?
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 and even ex-spouses 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 additional funds 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 and some lenders will still insist that
borrowers contribute some of their own equity towards the
purchase, even if there is a guarantor.


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. Although this insurance covers the lender against
the borrower defaulting on the loan, the borrower pays
the premium.

The amount of the guarantee will depend on the policy of the
lender. The guarantee 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).

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.
Depending on the lender, the borrower may be required to pay
some additional fees at the time of a request to release the
guarantor. This can include a fee for the lender to revalue the
primary security property as well as lender discharge fees.

What are the implications for the guarantor if the
borrower cannot pay back the loan?
If the borrower is unable to pay back the loan according to
the terms of the contract, 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.
Anyone who is considering being a guarantor for a property
loan is advised to seek independent legal and financial advice
before accepting the role of guarantor. Most lenders will
insist on this, prior to accepting a guarantee.
It is important to note that a guarantor’s ability to borrow
will be reduced after they have agreed to act as a guarantor.

Example of avoiding LMI due to guarantor 

providing security
A borrower wishes to purchase a $400,000 property
and will need to borrow $380,000. This loan has an LVR
of 95%, which would incur LMI.
If a family member is willing to provide a guarantee for
the home loan, using the equity in their own property as
additional security, the LVR would reduce and avoid the
need for LMI, saving the borrower approximately $11,600.

 

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