What is a guarantor home loan?

A guarantor home loan, sometimes referred to as a family pledge, is a type of home loan where instead of a deposit you use a family members (guarantor) property as additional security.

Essentially, in most cases 80% of the loan amount will be secured on the property you’re buying and the remaining 20% on your guarantors’ property.

We now do what is known as a limited guarantee, where the guarantors are not liable for the entire mortgage but rather a percentage up to 20%.

What are the benefits of a guarantor loan?

A guarantee lets you receive the benefits of having a 20% deposit. This especially helps First home Buyers, whether here on the Gold Coast or anywhere else for that matter, to enter the market sooner.

These include:

• You don’t need a deposit, allowing you to purchase your home sooner.
• You can borrow 100% of the purchase price.
• You can avoid paying LMI.
• You may get a better interest rate.
• You may not need to pay anything upfront.

What makes a good guarantor?

In the eyes of the lender, the guarantor needs to have sufficient equity in their property. This can be an Owner-Occupied property, however lenders prefer using an investment property.

Lenders prefer that the guarantor’s property be unencumbered (no mortgage). Especially if it is their Owner-Occupied property.

In some cases, the lender will allow the guarantor to take out a second mortgage if they have existing debt on their property, however most lenders would want the guarantor to refinance their property with the same lender.

How long is the guarantor liable?

The guarantor is liable for their share of the loan in the event that the borrower’s default, stop paying the loan, for any reason.

A guarantee can be released once there is sufficient equity in the property, generally at least 20%. This can be through repayments or capital gains or both.

A guarantee can also be released if the loan is refinanced.

Lastly things a guarantor should be aware of.

Ensure that you fully understand your financial position and that of the borrowers. Entering a contract with eyes wide open is essential. Last thing you would want to happen is that you needed to pay out your share of the home loan/limited guaranteed amount.

Your relationship to the borrowers is another essential element to a harmonious experience when becoming a guarantor. The closer your relationship with the borrowers the more likely that person/s will not let you down.

It is advisable to seek professional advice. Some lenders advise you seek advice from your legal representative and some require it.

In conclusion

A guarantor loan can assist a borrower purchase a property sooner by eliminating the need for a deposit and removing the requirement to pay for LMI. It is important for the guarantor to be aware of their responsibilities if the borrower defaults and there are criteria that a lender looks for in a guarantor. In today’s property market it is increasingly more difficult to save a 20% deposit and purchase in the regions that you want or need to live, this is a great way to help out a family member. Please contact us if you have any questions.