There are two things you need to know about guarantors. The first is using a guarantor can help you get a loan that covers the full cost of buying a property – even more, in some cases – and you don’t even need to have a deposit. That means having a guarantor can get you into home ownership sooner.
The other thing to know is anyone prepared to be guarantor for you (or anyone, for that matter) is someone very special. In effect, they’re saying they will vouch for you in the most material way possible – by taking responsibility for the biggest debt you’re likely to have if you get into difficulties.
They aren’t just making a promise – they are taking an oath that’s legally binding.
A home loan with a guarantor can help you to buy, even if you don’t have a deposit saved. This guarantor, who is usually an immediate family member, may also contribute additional income to help you pay off the loan.
A guarantor becomes legally obliged to service payments on your loan should you become unable to do so.
Borrowers can remove the guarantees from their loan once they have paid off a certain amount. This will vary depending on the lender, with some even allowing borrowers to place limits on how big their guarantees are.
Guarantor home loans offer you several benefits beyond not needing a deposit:
This depends on several factors, including the type of loan and the size of the guarantee.
Borrowers can consolidate existing debts into their guarantor loans. This means you may end up borrowing up to 110% of your home’s value. Lenders won’t consider consolidation for borrowers with debts that are more than 10% of the property’s value.
In the end, you need to service the loan. Lenders want to know that you can put money aside to do this. That why most will want those applying for guarantor loans to have 5% of the home’s value in genuine savings.
The good news is that you don’t have to use these savings for the loan. Lenders might consider previous rent payments as proof that you can service the debt.
Some lenders have credit rating systems that decline some guarantor loans, even for those who have been saving regularly. This is usually because the borrower has few assets, which may class them as high risk.
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So, what does a lender look for in a guarantor?
First and foremost, it’s a tight relationship with the buyer. Usually, this means family.
Other guarantor home loan requirements that may affect the lender’s decision could include:
Of course, your guarantor also needs to be of sound mind and should seek their own professional legal and financial advice before making this decision.
Several options are available for guarantor home loans:
All of these are what lenders call “family guarantees”. It’s rare that guarantors are not family members.
Lenders take two securities against the loan. These are usually the purchased property and the security the guarantor places on the loan. In the case of parents, this might be the family home.
Lenders may limit the level of security that guarantors offer, limiting their liability.
Lenders may refuse to offer guarantor loans to those who have previously owned homes. In these cases, they could argue that a borrower should have enough to finance their own deposits for new homes. This may cause an issue for those who have left their property due to a situation beyond their control, such as a divorce settlement. Book a call with our customer care team today to discuss your options.
These loans come with risks, of course, but lenders tend to work with borrowers and guarantors to find solutions to problems. They will avoid selling the home in anything but extreme circumstances.
For example, let’s say you lose your job. Most lenders will prefer to wait things out rather than sell your home. In many cases, they may offer you a lower home loan rate until you get back on your feet.
Guarantors have several other protections. For one, a bank will sell the borrower’s property first, should a security need selling. This may occur if the borrower fails to make loan payments for between 90 and 180 days. In some cases, this will prevent the guarantor from having to pay any of the loan.
Limited guarantees offer more protection. This is especially important if the sale of the borrower’s house doesn’t cover the loan. In such cases, the guarantor only needs to cover the loan up to the limit.
A guarantor could take a second mortgage or personal loan to cover their costs. It is only when guarantors exhaust all other options that lenders sell the house used as a guarantee. Even then, the lender only takes the amount needed to cover the debt. The rest goes to the guarantor.
It’s crucial that you talk to an independent expert before choosing to be a guarantor. In some cases, you can secure a parent-assisted home loan instead. This will let you help your child without taking on as much risk.
In all cases, you should ask yourself three questions before becoming a guarantor:
Most borrowers don’t want a guarantor on their home loans for the entire loan period. Lenders will usually remove a guarantor once you have met certain conditions. They will want to see that you can meet your payments comfortably. This usually means getting no assistance while making all of your payments for at least six months. Most will not remove the guarantee until you have paid between 10% and 20% of the home’s value. In most cases, this takes between two and five years. You also need to take property depreciation into account. If you remove the guarantee before paying off 20% of the property’s value, you may have to pay LMI.
Most lenders won’t provide guarantor loans if your nominated guarantor is no longer working. Those that do will require the guarantor speak to a legal professional before agreeing to the loan.
Yes, as long as your parent has equity and is willing to take out a second mortgage. In such cases, lenders use several calculations to figure out if the guarantor is eligible. Lenders will find the current value of the guarantor’s home loan. They then combine this figure with the limited guarantee for the guarantor loan. If the combined figure is less than 80% of the value of the guarantor’s home, the lender may accept the guarantee. This is not the case for all lenders. You can email us at customer.care@uno.com.au or book a call with our customer care team today to find out more.
You shouldn’t complete a loan application until the guarantor has confirmed he or she can get a second mortgage. The lender also needs to complete a valuation of the guarantor’s property. Finally, the guarantor needs formal approval from the lender. With all of that in place, you can move forward with your application.
It comes down to the security. Lenders will charge LMI on loans that are more than 80% of a property’s value. This is because the lender stands to lose money if the borrower defaults. A guarantor mostly eliminates this risk. Lenders will see the guarantee as equivalent to the LMI payment. Thus, the lender waives the LMI.
Some lenders allow you to pull your current debts into a guarantor loan. Bear in mind that lenders have their limits. As a rule, you can’t consolidate debt that is more than 5-10% of your home’s value.
This is a way of getting a low doc loan with a guarantor. Lenders don’t tend to allow guarantors on low doc loans. However, you could have a guarantor take out a loan of 20% on your property. You will cover the other 80%. The guarantor then gives you the 20% loan to use as a deposit. Please note this is a risky method and you should seek independent advice before going down this path. Even then, very few lenders will allow you to do it.
You can as long as you’re careful. You will need to apply for your construction and land loans at the same time. This is because lenders won’t increase a guarantor loan.
When a sentence begins with, “Dad, remember that time when I was a 15-year-old, and you said if I washed your car you’d give me $20, and I did, but then you forgot to pay me?”, be aware of what’s coming next.
Becoming a guarantor for a home loan comes with risks. The good news is, lenders tend to work with borrowers and guarantors to find solutions to problems. They will avoid selling the home in anything but extreme circumstances.
UNO Brokers are available night and day for a quick review or your situation and bring expertise that will support better decision making that will save you time and money. Book in a quick call when it suits your busy schedule
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