Guarantor loans are now the only way to borrow 100% of the purchase price as traditional no deposit home loan have been withdrawn from the market.
Did you know that there are differences between different lenders and their guarantor home loan policy?
With the help of a guarantor you can borrow over 100% of the purchase price. This will allow you to buy a home and pay for purchasing costs such as stamp duty and legal fees at the same time.
How do guarantor loans work?
Your guarantor will provide a guarantee for your home loan which is secured on their property. In most cases this is someone’s parents assisting them to buy a home.
The idea is to help you to get your foot into the property market. Once you have paid off part of your loan or your property has increased in value then you can apply to remove the guarantee.
Guarantor loans have become very popular in recent years as they cost less than standard home loan, they allow you to buy without a deposit and some lenders now allow you to limit the size of the guarantee.
Who can be a guarantor?
Most banks will only allow parental guarantees, that is, a guarantee from the borrower’s parents.
Some lenders can consider guarantees from immediate family members such as siblings, grandparents, spouses, de facto partners or adult children. Friends, workmates or associates are not normally accepted because the banks want to make sure that the guarantor has a strong relationship with you.
If someone other than your parents is your guarantor then you may need to meet additional lending criteria in order to qualify for a home loan.
What if my parents already have a home loan?
That’s ok, as long as they have sufficient equity then some of our lenders can still secure a guarantee on their property using a second mortgage.
How do lenders work out if your guarantor has enough equity in their property? The total debt secured on the guarantors property, you can work this out by using the current home loan plus the new limited guarantee, must be less than 75% – 80% of the value of their property.
For example, if your guarantor had a home loan with $200,000 owing and they needed to give a limited guarantee of $200,000 then the total debt secured on their property would be $200,000. Their home must be worth $467,000 or more for the guarantor loan to be considered/approved.
What types of guarantees are there?
Security guarantee: With this type of guarantee the guarantor uses real estate that they own as additional security for your loan. If the guarantor already has a loan on their property, then in most cases the bank can take a second mortgage as security. This type of guarantee is most often used when first home buyers are buying a home, have an excellent income, but no deposit. The guarantor is also called an “equity guarantor” by some lenders.
Security & income guarantee: A security and income guarantor is most often a parent helping their son or daughter who is a student or who has a low income to buy their first property. The lender will use the parent’s property as additional security and will rely on the parent’s income to prove that the loan is affordable.
Family guarantee / parent guarantee: This is when the guarantor is directly related to the borrowers. Banks refer to this as a “parental guarantee”. Grandparents, siblings and other family members as guarantors are considered on a case by case basis.
Limited guarantee: A limited guarantee is where only part of the loan is guaranteed by the guarantor. This is most often used with security guarantors so as to reduce the potential liability secured on the guarantor’s property. Guarantees can either be limited or unlimited, depending on both the guarantor’s wishes and the lender’s requirements.
Legal and financial advice before becoming a guarantor.
Guaranteeing somebody else’s loan is a major commitment so you should always seek advice from the appropriate professionals such as your solicitor before deciding to proceed.
We recommend that you have a preliminary discussion with your solicitor before you apply for the loan and then take the ‘Guarantee & Indemnity’ documents to your solicitor for legal advice prior to signing them.