Guarantors and how first home buyers are using them to get into the market


Article from Mark Cleland, Mortgage Choice

Many lenders 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. A co-applicant is included on the loan and is responsible for the entire loan until it is fully repaid. A guarantor, however, is linked to the loan by the guarantee which can be released without the loan being fully repaid. Borrowers must be able to service the entire loan on their own income/s.

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 lender will 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. This could be a parent but also includes siblings and grandparents. Some lenders will allow extended family members.

Benefits of Using a Guarantor:

1. Secure additional funds- Having a guarantor allows home buyers who only have a small deposit, but have the ability to make the loan repayments, secure additional funds to purchase their home.

2. May be able to borrow the full purchase price- Saving a deposit can be daunting for purchasers and it can be hard to do if you are already paying rent. By having a guarantor, the borrower may be able to borrow the full purchase price and in some instances also additional costs.

3. Save on additional costs such as LMI- Another benefit 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 an insurance which lenders take out to cover the risk of a high Loan to Value Ratio [LVR] lending. Although the Lender is covered the borrower pays the premium.

4.  Guarantee amount depends on the policy of the lender- The amount of the guarantee will depend on the policy of the Lender and it 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]

5.  Guarantor can be released from the loan- After the borrower has built up equity in the 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 payments made and whether the property has appreciated in value over the time period. Depending on the lender there may be fees for releasing the guarantee such as valuation and discharge costs.

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, the lender can take legal action against the borrower and in some circumstances, the guarantor. The guarantor is liable for the amount specified in the guarantee. Anyone who is considering being a guarantor is advised to take independent legal advice. Most lenders will insist on this, prior to accepting the guarantee. It is also important to note that a guarantor’s ability to borrow will be reduced after they have agreed to act as a guarantor.

For further information; please contact Mark Cleland from Mortgage Choice on: 0447 366312


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