What is a guarantor?
A guarantor is a person who offers their property as additional
security for the borrower’s home loan application.
The guarantor does not need to provide any cash payment but rather agrees to offer part of their home equity to enable the borrower to borrow more for their purchase. In
this way, a guarantor can allow a borrower to buy their own home sooner.
Who can be a guarantor?
Guarantors are generally, but not limited to:
De facto partners
Depending on the lender’s policies they could also accept extended family members.
This is where a mortgage specialist can help work out which lender will work best for you.
How does a guarantor home loan work?
Saving a deposit for a home can be hard and time-consuming. Having a guarantor to help can be a solution to getting into the property market sooner. This means you need a smaller deposit and depending on the lender, you may not need a deposit at all. That is because a guarantor will offer equity in their own home as additional security for your loan.
"I want to buy my first home for $500,000. I have saved up $25,000 for my deposit."
Note that for simplicity and clarity we will not be including fees and other
expenses associated with buying a home. For a more accurate and realistic look into your own scenario, speak to a mortgage/financial professional.
Solution A – Not Using a Guarantor
*calculated using Genworth’s LMI premium estimator as a first home buyer
You can proceed with the purchase, however, the lender will ask you to pay LMI because you are borrowing more than 80% of the security value.
Alternatively, you can save an additional $75,000 (up to $100,000) which can take some time. This means you may:
Miss out on an opportunity to own your dream home or;
Potentially buy the same property at a higher price in the future.
Solution B – Using a Guarantor
If your guarantor offers a $75,000 portion of their property as a guarantee you can:
Use the $75,000 guarantee in conjunction with your $25,000 deposit
Reduce the LVR to 80%
Avoid the $15,960 LMI Premium
What are the guarantor loan requirements?
The guarantor will need to have an existing property with enough home equity which will be used as a guarantee. Home equity is the difference between the value of their property and what is left owing on their home loan.
Agreeing to be a guarantor is a big decision. If you cannot keep up the repayments on your loan, the lender can ask the guarantor to pay off your home loan. It is important for anyone that is considering becoming a guarantor to seek independent legal and financial advice before accepting this responsibility.
Do I need savings if I have a security guarantor?
This is a case by case basis. Some lenders may still require you to demonstrate a minimum of 5% genuine savings of the purchase price. Genuine savings refers to money saved by yourself overtime or in some cases if you are renting, you may be able to use a rental ledger to support the genuine savings requirement.
Some lenders do not have a specific policy regarding this but would use a credit scoring system that will determine if your loan is system approved or declined.
Talk to one of our mortgage specialists to find out which lenders do not require genuine savings.
What are the benefits for home buyers?
You only need low or no deposit for your purchase
Save money by not paying any Lenders Mortgage Insurance (LMI) which can be in the thousands
Have access to discounted interest rates with some lenders
You may be able to borrow other cost associated with buying a property such as stamp duty, conveyancing fees etc.
You can limit the size of the guarantee
What are the risks of being a guarantor?
As a borrower, you are liable for the home loan for which you applied. This liability would ultimately fall on to the guarantor if the borrower defaults or unable to make their scheduled home loan repayment.
In the event of a worst-case scenario where you are unable to make your
home loan repayment and have been in arrears for 90 – 180 days, lenders will always sell your property first before making the guarantor liable for any outstanding debt owed.
In most cases, there is a limited guarantee of up 20% of the purchase price for the guarantor.
If the outstanding debt is $400,000 with a limited guarantee of $100,000 and the property is sold for $350,000, then the guarantor is liable for the $50,000.
If the property is sold for $400,000 then the guarantor is not liable for anything because the sale price covers the outstanding balance.
When can I remove the guarantee?
This guarantee option is typically a short-term solution and is not designed to be in place for the full 30 years.
You can apply to the lender to remove the guarantee when the following conditions have been met:
You have been making your home loan repayments on time
Your existing loan is no more 80% of your property value as a standalone
You can still remove the guarantee if you owe more than 80% of the property value but you may have to pay LMI to achieve this.
To remove the guarantee, you must request this from the lender because it is not done automatically.
How long before I should consider removing the guarantee?
You can typically apply to the bank to remove the guarantee somewhere between 5 and 7 years after settlement. This generally depends on;
How much the property has appreciated in value
What is your outstanding balance at the time (if you select principal and interest repayment, your loan balance will reduce overtime)
Are there other protections for guarantors?
As of 1st July 2019, the Australian Banking Association enforced a new Code of Banking Practice (COBP).
As part of these new guidelines:
Guarantors are given a minimum of 3 days to review their guarantee documents giving the guarantor enough time to consider their obligations before signing and returning their guarantee documents.
Guarantors will have a cooling-off period after signing the guarantor agreement.
Guarantors will be encouraged to seek independent legal advice before signing.
If the borrower gets into financial difficulty, or circumstances change, the guarantor will be notified by the lender.
The lender will first act on your property as the borrower before imposing the liability onto the guarantor to repay the home loan.
At the end of the day, there is no full-proof way to protect the guarantor which is why it is always recommended for the guarantor to seek independent legal and financial advice.
Can my parents sell their property if they are a guarantor?
The short answer is yes so long as you have enough equity in the property that is in line with the lender’s guideline.
Your parents may want to sell their property because they wish to downsize to a smaller property to live.
The lender will conduct a valuation on the existing property to see how much
security they will be holding after they release the guarantee. If the overall LVR is less than 90% then the lender would be happy to proceed with the partial discharge on the guarantee.
But if you still owe more than 80% after the discharge, you can
Pay Lenders Mortgage Insurance (LMI)
Ask your parents if they can secure a bank guarantee for the difference
For example, if the guarantee required was $100,000, then they will need to provide the lender with a $100,000 term deposit to be held as security.
It is important to know when your parents will need to sell their property prior to signing on as a guarantor so you can establish if this is the right option for you and your parents.
For further advice about Home Loan Guarantors please get in touch with us.
JM Financial Solutions
0415 419 442