Saving for a home can be quite a challenge — it can take years before you have enough to cover a deposit and other costs. If your ability to repay the deposit is not feasible, you may consider applying for a guarantor mortgage.
- What is a guarantor home loan?
- Who can be a guarantor?
- How much can I borrow with a guarantor?
- Benefits and risks of using a guarantor
- Can you remove a guarantor?
- What do to if someone asks you to be a guarantor
- Can you sell your property if you are a guarantor?
What is a “Guarantor loan”?
Guarantor home loan allows a relative, usually a parent, to use their equity as security. While you’ll still have to borrow money and repay it all, the guarantor acts as collateral for the loan. This is in addition to the deposit that is normally required. Using a guarantor allows borrowers to take out a home loan without the usual 20% deposit requirement, meaning they don’t have to pay Lenders Mortgage Insurance (LMI).
If you are unable to make your mortgage payments, the guarantor is responsible for them. If they can’t make the repayments, the bank could seize their home to recoup the loss.
Guarantors have the choice of guaranteeing a specific amount, such as 20% or the entire loan. Once the borrower has repaid the guaranteed portion of the loan, the guarantor’s property is safe even if you miss future repayments. The guarantor can then request that the loan be cancelled.
A guarantor mortgage is not only for those who don’t have the money to deposit the loan but also for other reasons.
- Credit scores aren’t perfect
- You can get a lower interest rate by having a guarantor.
- Your conventional loan didn’t cover the amount that you requested
Who can be a guarantor of the loan?
Ideally, you should choose someone you trust—and more importantly trusts you in return — when looking for a guarantor. Guarantors are often chosen by friends, family and business partners.
Lenders will ask that you choose a guarantor who meets the requirements of the loan. Lenders will typically require guarantors.
- Either you have enough equity (at least 80%) or you can buy it outright.
- It is vital to have a steady income
- Personal credit rating of good
- A permanent resident or Australian citizen is possible.
- Must be at least 65 years old and over 18 years. Senior citizens and retirees are rarely accepted as guarantors by lenders.
- The guarantor’s property must be in Australia
Is there a maximum amount that you can borrow with a guarantor or a guarantee?
With a guarantor loan, you can borrow up to 100% of the property purchase price or even up to 110% in some cases (such as if you’re consolidating other debts into the loan). This will depend on the lender, the guarantor’s financial situation and how much of the loan they’re willing to be responsible for.
Some lenders may still require that you deposit. Usually, it is at least 5 percent in real savings.
Depending on the purpose, the terms of a Guarantor Loan will vary.
- Your first home can be purchased at 105% of the property value
- Construction: 105% of the total land value and construction costs
- Consolidation or purchase of debts: 110% of the property’s value
- Investment: 105% of your investment property’s value
- Refinance: 100% the property’s worth
Lenders may place additional requirements on borrowers who borrow more than $1m, even though there is no maximum loan amount.
Use of a Guarantor: The benefits and the dangers
Guarantors have many benefits
Guarantor loans offer the best benefit: having someone to help you apply for a house. Even if you have a low credit score or deposit, a guarantor can increase your chances of being approved.
If you are:
- Jump in to the property market faster
- You can still apply for a loan even if you don’t have to deposit 20%
- LMI is not well worth the expense
- You could potentially get lower home loan rates
- Consolidate minor debts
What are the possible risks of using a guarantor as a guarantee for your payment?
Guarantor loans are as risky as other types of financial products.
The loan will be repaid by the guarantor if you default on your payments. The guarantee is responsible to pay mortgage repayments if you can’t repay your loan. If they’re unable to do so, the guarantor could be forced to sell their home to repay the loan.
Guarantors who don’t have enough equity or savings to pay the debt may apply for a second mortgage or loan on the property. If all other avenues have failed, the bank will only allow the sale of the property. The loan’s limitable guarantee is not covered by enough funds. The rest of the proceeds from the sales will be paid out to the guarantors.
This could pose a risk for the guarantor – especially if they are approaching retirement. This could cause them to stop planning for retirement.
Other risks include the guarantor’s credit report being ruined if the worst-case scenario happens and neither you nor they can make the mortgage repayments. You’ll have essentially ruined their credit report for a debt that wasn’t theirs.
These risks can ruin the relationship with your guarantor if they come to fruition, which is why it’s important to understand the responsibility you’re asking them to take on.
Can you remove a Guarantor?
If you comply with these conditions, your guarantor could be relieved from their responsibility.
- Without any assistance, you can repay your debts.
- The principal amount of your loan is less than 80% of your property’s value
- In the six-months that have passed, you have not missed any payment
What do you do if someone asks you to be a guarantor for your loan?
Before you accept their offer to be their guarantor, it is important that you consider your financial situation. You must be willing to serve as a guarantor.
- Assess if you can act as a lender guarantor on the loan, and if the borrower is able to repay the loan.
- Be sure to consider your relationship with the borrower
- To fully understand the loan process, seek independent legal and financial advice.
- Determine the extent of your responsibility to the borrower, and what you can do for him/her.
- You should ensure that you can afford the monthly payments if you require outside assistance.
- Reduce your risk exposure by ensuring that the loan does NOT exceed 90% of total property value
- Get guarantor protection
Can you sell your property if you are a guarantor?
It is possible that your house will not sell or you may need to borrow money to pay your mortgage. There are options if you need to sell your house.
Seek out if your LVR is higher than 90% to see if you can borrow the money. After you have sold, you may be able to secure your guarantee with a dollar-for dollar term deposit. For your $100,000 guarantee to be valid, you must make a $100,000 term deposit.
Talk to an expert
If you are going to act as a guarantor on a loan, it is a good idea to consult an expert.
Before you apply for a guarantee loan, a professional like a mortgage broker can help you assess all aspects of your finances. Since many lenders are cautious when it comes to guarantor loans, mortgage brokers will help you find the right mortgage product for your needs.