Saving for a deposit is time consuming and costly to say the least! Obtaining a 20% deposit is difficult in a rising property market, and can restrict first home buyers. Lending becomes tighter for loans over 80%, and a Lenders Mortgage Insurance Premium is additionally required. When adding on stamp duties, government charges and solicitor fees, things can start to add up quickly!
Guarantor loans can offer a solution to this, allowing you to purchase with a lower deposit required.
So, what is a guarantor loan?
Your guarantor essentially ‘guarantees’ your home loan by using their property as security. That is, the bank holds both your property and your guarantor's property as security. Most commonly, parental guarantees assist in buying first homes. Say you wanted to purchase a property for $500k, but only had $25k cash savings, your parents could guarantee an additional $75k against their property to reduce your lending value to 80% of the purchase price.
What are the benefits?
- Lower deposit required
- Overall loan is 80% or less - so no Lenders Mortgage Insurance is required
- Interest rate may be lower - as rates with some lenders are tiered for loans above 80%
- Some lenders allow you to limit the size of the guarantee
When can I remove the guarantee?
If you can meet the following conditions:
- You can afford the repayments without any assistance
- Your loan is less than 80% of the property value
- You haven’t defaulted or missed any payments in the last 6 months
Are there risks involved?
The guarantor is essentially liable for your home loan in the event you default. That is, if you don’t pay, your guarantor will have to. Whilst this should not deter you from exploring the guarantor loan to help you purchase, it is important both the guarantor and yourself are aware of the potential risks. Most banks will therefore only allow parental guarantees, due to the commitment required by the guarantor. However, some lenders also consider guarantees from immediate family such as siblings, grandparents, spouses, de facto partners or adult children.
What if my parents already have a home loan?
For your parents to guarantee your loan whilst having a mortgage of their own, they need to have enough available equity in the property. If this is the case, some lenders will consider a second mortgage for the purposes of the guarantee. If you are not sure how much equity is in their home, or how this is calculated, one of our staff would be happy to run through this process.
Why should I consult an expert?
Becoming a guarantor on someone else’s loan is a large commitment. Seeking the advice of financial professionals; the likes of brokers, solicitors and financial advisors, should be sought before deciding to proceed.
Preliminary discussions with a solicitor are recommended before applying for the loan, and aiding your understanding in legal documents such as ‘Guarantee and Indemnity’ forms. TMFG can further assist in understanding the complexities associated with, and applying for this style of mortgage:
- Getting approval: Lenders are more conservative than ever, but they are particularly conservative with guarantor loans. We know which lenders accept which types of guarantees.
- Know the terms and conditions: Some banks have simple terms and conditions for their guarantor loans and allow you to limit the amount of the guarantee. However, many lenders will not limit the guarantee which places the guarantor at higher risk if you cannot make your repayments.
- The exit strategy: The loan may have a term of 30 years; however, you don’t need to keep the guarantee in place for that long. We can help you work out a strategy of either making extra repayments, or refinancing to remove the guarantee in as little as 2 to 5 years.
- Protecting the guarantor: If you cannot pay your loan, how can you protect your guarantor from having to pay for you, and possibly losing their home? Did you know that you can reduce the risk to the guarantor by obtaining insurance?
If you don’t set up your mortgage in the right way, you may be putting your parents at a higher risk, or you may not be able to remove the guarantee as quickly as you would like.
Do you have questions that were not answered above? Chat to us today, and allow us to help kick-start your financial goals!