How Does A Guarantor Work For A Home Loan?
✅A guarantor home loan forgoes the requirement for a deposit in place of your parents property as collateral. Hence their property guarantees the place of your deposit.
✅Most lenders will only allow your parents to guarantee a home loan. Some allow immediate family members such as brothers & sisters or de-facto partners. Most do not like grandparents.
✅You can borrow up to 105% of a property's purchase price with a guarantor home loan.
✅Your 20% deposit comes from your parents collateral (their house). The remaining 80% is borrowed against the property you are purchasing.
✅You can use a limited guarantee which will reduce your parents exposure to your mortgage.
✅It works like a mortgage on your parents home. And if your parents already have a mortgage, then it will act as a kind of second mortgage on their home.
So How Much Can I Actually Borrow?
✅Construction: 100% of the property value.
✅First Home Buyer: 105% of the property value.
✅Investors: 105% of the value of the property.
✅Refinance a property: 100% of the property value.
✅Purchase with debt consolidation: 105-110% of the property value.
✅The maximum borrowing capacity is usually 105%. This is to account for purchasing costs etc. Some lenders go up to 110% if you have debt to consolidate, however, this is usually contained at 5% of the purchase price of the property.
Why Would I Use a Guarantor Home Loan?
✅If you don't have any deposit; it allows you to get started in property.
✅If you don't have 20% deposit; it allows you to eliminate LMI as your parents house was used in place of a 20% deposit.
✅You can consolidate all your debts into your home loan at the time of purchase.
There are many types of guarantor loans
✅Security guarantee: the guarantor uses their real estate to secure your loan. If the security has a mortgage, then a second mortgage is taken out.
✅Limited guarantee: where only part of the loan (usually the deposit + purchasing costs) are guaranteed. This is negotiated with the lender, as they will not take on an asset from a vulnerable person. Mortgage Broker Revesby likes these guarantor loans the best. Nobody wants to cause their parents harm if things become unmanageable for the borrower.
✅Family guarantee: the guarantor is your parents or family member. Some lenders won't look at grand parents if they would be exposed to risking their primary place of residence and close to retirement.
✅Income + Security guarantee: if the borrower has a low income, the guarantors income is used to prop up serviceability. So they will guarantee the loan with their property and their income.
Isn't A Guarantor Loan Risky To My Parents?
✅It certainly is something you should discuss with Mortgage Broker Revesby & your parents in detail before taking on a guarantor loan. Your parents are ultimately responsible for your mortgage should you default.
✅The banks usually do not take selling your parents home to pay your default lightly. They will work with you to solve the problem before taking somebody's primary place of residence. They will much rather you keep your mortgage and get back on track.
✅The borrowers home will be sold first - not the guarantors. If the property sells for more than the outstanding debts, the guarantor is not liable for anything.
✅There are options to limit the size of the guarantee to the deposit amount.
✅Lenders will not approve a guarantor loan on a primary place of residence to a vulnerable person, such as those parents that are retired and living on a pension.
✅A guarantor home loan is your parents way of helping you buy your first property sooner. But after a few years, once the property has increased in value, or you have paid down the loan, you should apply to remove the guarantee through refinancing or speaking to your lender. Mortgage Broker Revesby will facilitate all this for you.
✅These loans have been very popular with First Home Buyers recently as property prices continue to rise.
Can I build a property portfolio using multiple guarantor home loans?
✅There are a couple of lenders that will allow no deposit investment loans supported by a guarantor. But they are few and far between. Investing using this practice is generally limited to one investment property and not more. The bank won't allow you to take on a loan that will put your guarantor at too much risk - as they aren't the ones that will make the money if it goes well. There must be 'consideration'.
✅If your guarantor is quite wealthy, however, this can be considered.
✅Most lenders will not allow multiple properties using guarantor home loans.
✅Not intended as a property investment strategy (there are many other ways).
✅Targeted at First Home Buyers looking to get a start on the property ladder.
✅There are lenders that will allow this strictly for people who have gone through a divorce and are starting again.
What if I can't prove genuine savings?
✅Some lenders can substitute your current rent as genuine savings, claiming that if you can pay rent, then you can pay off a mortgage to that degree.
✅Some banks still prefer you to have genuine savings. This means saved over a period of three months or longer.
✅Lenders apply a HIGH RISK view to high income earners who have very little in the way of savings or assets. It shows lack of discipline and disregard for paying back the loan. If you are young and have just paid off your HECS or wedding, then you won't fall into the high risk category. These are reasonable expenses at an appropriate stage of life. I am referring to those who blow every cent they earn on holidays and eating out etc.
✅Mortgage Broker Revesby can help you identify the lenders that do not require genuine savings.
Is the guarantor exposed to the whole mortgage amount?
✅Mortgage Broker Revesby prefers to limit the guarantee secured on your guarantor's property. They won't be liable for your whole mortgage, only to what they have agreed.
✅This normally works out to roughly 20% (your deposit) plus purchasing costs (or near enough).
✅For example: Sue wants to purchase a house for $800,000 and borrow the purchasing costs of $35,000. He mother guarantees the loan for a 20% deposit ($160,000) plus purchasing costs ($35,000). Sue's mother is at risk $195,000 as a guarantor for her daughters loan.
✅Sue's mother can always take out a second mortgage or personal loan to pay this $195,000 if she doesn't have the savings to cover (in the event of default). If she can't access this credit, only then will the lender sell her home up to the guarantee limit.
Can I remove the guarantee after I pay down the loan?
✅Absolutely! And this is common at the 3-5 year mark. Once your loan is ideally below LVR 80% and you haven't missed any payments, apply to the bank to have this guarantor removed.
✅If your property appreciates and is now valued higher, we can refinance to another lender with a LVR of 80%. You can still refinance above an LVR of 80%, however, you will pay Lenders Mortgage Insurance to do this.
✅Mortgage Broker Revesby can also refinance you to another lender.
✅Your guarantor should also take the 'guarantee and indemnity' documents to a solicitor before signing them. It is wise to get advice.
Should I see a financial advisor before taking on a guarantor loan?
✅I think it's wise. And Mortgage Broker Revesby can introduce you to some we work alongside. We don't take a fee here, just happy you're making wise choices.
✅They will help you set up the appropriate insurances in the event of sickness, death or disability to take this burden off your guarantor if the worst should happen. A good advisor will know the best product to suit your needs.
What if my guarantor wants to suddenly sell their home?
✅Usually you will need an LVR of 90% to remove the guarantee with most lenders.
✅You could refinance to another lender at LVR 90% but this would attract mortgage insurance.
✅ Your guarantor may not be able to sell their home until you can refinance or remove their guarantee.
✅They can secure their commitment with a similar term deposit amount. So if they sell their home, they would need to leave some of the capital behind in a term deposit to cover their promise.
✅It is a big commitment and not one to take lightly.
No fee service.
Matthew Stack
matthew@mortgagebrokerrevesby.com.au
0423 237 242
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