Guarantor Home Loans

Guarantor Home Loans

 

Increasingly popular options for many home buyers, guarantor home loans are being used in greater numbers to purchase a property.  These loans are actually no different to any other home loan, the main difference is the security offered to guarantee the deposit.

Many lenders allow people to provide assistance known as a guarantor. Typically these people are direct family members eg a parent. They are not a co-applicant for the loan so they are not listed in the lending documents and are not responsible for the entire loan. A guarantor is only responsible for the payment of the loan they have guaranteed to support.

Guarantor home loans are usually only used when the applicant has a limited deposit, typically less than 20% of the purchase price (the deposit amount). Guarantees such as these are used to avoid costly Lender’s Mortgage Insurance (LMI) that would otherwise be charged by the lender to protect their interests in the loan.

 

How does a Guarantor Home Loan work?

 

You make the usual application for finance. You must be able to afford to service (pay off) the loan in your own right, a guarantor is not a co-applicant for the loan. The financial products offered will be the same as making a standard finance application. The main difference is the security offered. You will offer two securities for the property. The main security will be the home you are purchasing. The second or guarantor security will be another one offered to secure the deposit for the loan.

As these loans are seen as slightly more risky for lenders it is very helpful if your credit history is very good. If you have any missed payments or outstanding bills pay them off before applying. Any marks on your credit file will work against you.

The lender will take a mortgage out over the guarantor’s property. This mortgage will continue to be in place until the guarantee expires. It is important to note that the second mortgage does not support the loan – you must be able to support the loan yourself for your own income sources.

Compare Guarantor Home Loans

 

Who can be a guarantor?

 

Lenders are quite particular about who can be a guarantor for a home loan.  Typically it is a parent or parents who guarantee the loan. Depending upon the lender some other people can be guarantors, grandparents, siblings, even others can be included. It depends upon the lender and their requirements.

 

Benefits of Guarantor Home Loan

 

The short answer is they get into your own home sooner. Saving money is hard, paying rent makes that task doubly difficult. If you can demonstrate a savings history, even if only relatively small then a guarantor home loan could assist in getting into your own home sooner. It is almost certain however that most lenders will require you to contribute some cash to you own purchase.

Putting a deposit down is a good thing, it means less cash to spend on interest and gives you the ability to build up equity faster in your own home.

 

Negatives of a Guarantor Home Loan

 

While no different to any other home loan, a Guarantor home loan comes with a catch. You need to pay off your loan as agreed with your lender. Like with any home loan your lender can seek to recover funds you if you fail to make a payment. The catch with a guarantor home loan is that if you default they also come after your guarantor.

Lenders are legally required to make all reasonable efforts to keep you to your mortgage obligation. Once that obligation has been met they then can quite legally make your guarantor pay the outstanding or in the worst case scenario force the sale of both your house and your guarantors’ house to recover their funds.

Case law is littered with defaults, where parents have gone guarantor and have simply not understood what they have signed.  Many lenders now require prospective borrowers and guarantors to seek independent legal advice to ensure they understand their obligations. The golden rule is to understand what you are signing up for, and importantly understand the pitfalls if things go wrong.

If they do go wrong the first people you should be speaking with are your guarantors and then soon after with your lender. Lenders are legally obligated to assist you where-ever possible.

 

Guarantor Home Loans Aren’t Forever

 

The good news about Guarantor home loans are that they are not forever. Typically guarantees only last as long as they are needed. Typically they become irrelevant when you have reached the magic 20% equity in your property. This can occur in two different ways. The first and most common is that you pay off enough of your loan that your loan is below 80% Loan to Valuation Ration (LVR). Typically this is done by people paying off far more than the minimum off their loan and getting below that number. The other less commonly used way is that the house has increased in value sufficiently to again mean that the lending amount is less than 80% of the LVR. Using this method you’ll also need to undertake a formal valuation of your property by a registered valuer (usually at your expense).

Guarantor home loans are a great way to enter housing market. Used properly these tools are an effective method of gaining access to your own property sooner. You’ll find the method of applying for your home little changed other than the guarantee requirement. You’ll need to be able to demonstrate a savings history. The ability to demonstrate serviceability to pay off your loan as required is essential.

Guarantor home loans are not for the faint hearted. They need to be fully understood and as such we recommend you obtaining independent legal advice to ensure you understand you obligations when entering this course of action. Used wisely, there is no reason why this option of obtaining access to property should not be any less successful than a more traditional method of buying a property.

Talk to our friendly team of Australian Credit and Finance mortgage experts who can help you navigate your way through the process of buying a home, investing in property or refinancing your home loan. Call us today on 1300 735 557 to discuss your guarantor home loan options.
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