A Guarantor Can Help You Access a 100% Home Loan
In recent years, lenders have stopped offering traditional home loans of 100% of a property value. Even so, some borrowers can access 100% loans with the help of a guarantor.
What is a guarantor loan?
With a guarantor, a borrower can get help from somebody who places a guarantee against the borrower’s home loan. Usually, this will be a parent or guardian. The guarantee is often secured against the guarantor’s property.
The key benefit is that a guarantor loan allows you to buy a home without saving a deposit. This offers first-time buyers a quicker route onto the market.
Better yet, borrowers can remove the guarantees from their loan once they’ve paid a certain amount off. This will vary depending on the lender, with some even allowing borrowers to place limits on how big their guarantees are.
Lenders will not often give guarantor loans to people who have owned homes in the past. They argue that the borrower should have enough to finance their own deposits for new homes. This causes issues for those who have left their homes due to situations beyond their control. For example, losing a home to illness or divorce could leave you without the required deposit. Luckily, there are some lenders who take such situations into account.
The key benefits
Guarantor home loans offer several benefits beyond not needing a deposit.
They include the following:
• You could avoid paying Lenders Mortgage Insurance (LMI). This can save you thousands of dollars.
• You can limit the guarantee so the guarantor faces less risk.
• Some lenders offer lower interest rates on loans with a guarantor.
• Some guarantor loans allow you to consolidate smaller debts into the loan.
How Much Can I Borrow?
How much you can borrow depends on several factors. These include the type of loan and the size of the guarantee.
Here’s a general overview:
• First-time buyers can often get loans of 105% of their home’s value.
• Those looking to build their own homes can access 105% of the combined construction and land costs.
• Some investors could access a 105% loan. Usually, this only applies to first-time investors. Further, very few lenders offer guarantor loans to investors. Those investing in several properties usually can’t access guarantor loans at all.
• Borrowers who want to refinance their homes can get a loan of 100% of the property’s value.
Most lenders place no limits on the size of the loan. Even so, many do ask people to meet some other criteria if the loan exceeds $1 million. These criteria vary among lenders.
Beyond this, borrowers can consolidate existing debts into their guarantor loans. This can result in you getting 110% of your home’s value. This is the only way to get more than 105% of the home’s value with a guarantor loan. Lenders will not consider consolidation for borrowers whose other debts are over 10% of the property’s value.
Do I Need Savings?
Lenders want to know that you can put money aside in genuine savings. This shows that you can commit to making some form of monthly payment. As such, most will want those applying for guarantor loans to have 5% of the home’s value saved. The good news is that you don’t have to use these savings for the loan. Further, some lenders will consider previous rent payments as genuine savings.
Unfortunately, some lenders have credit rating systems that can decline a guarantor loan. This can happen even if you have savings put aside. Usually, this is because the borrower has few assets. Even if you have a high income, having few assets can cause lenders to class you as high risk.
Fortunately, there are many lenders who understand that having few assets does not make you a risk.
The Types of Guarantee
Lenders offer several home loan products related to guarantor loans. The difference is usually the type of guarantee attached to the loan.
The guarantee types are as follows:
• Security Guarantees: The most common type of guarantee. This is when your guarantor secures the loan against a property. If there is a loan against the property, a lender may accept a second mortgage as a guarantee. A common term for this type of guarantor is “equity guarantor”.
• Limited Guarantees: These ensure guarantors don’t accept liability for the full loan. Both the lender and guarantor can decide if this security type works for the loan.
• Security and Income Guarantees: With this guarantee, the lender requires the guarantor to provide a loan security and proof of income. This is because the guarantor will use their income to pay for the loan, at least for a short period. First-time buyers with low incomes most commonly use this guarantee.
Beyond this, lenders call any guarantee that involves a family member a “family guarantee”. All of the above can be family guarantees. In fact, it is fairly rare for a guarantor not to be a family member.
Guarantor Loan Structures and Limits
Lenders structure guarantor loans by taking two securities against the loan. These include the purchased property and the security the guarantor places on the loan. As previously mentioned, the guarantor’s guarantee can come in several forms.
In many cases, lenders limit the security the guarantor offers. This places lower liability on the guarantor. A typical calculation for this is as follows:
Guarantee Size = (Amount of Loan – (0.8 x Home Purchase Price) / 0.75
That sounds complicated, so let’s break it down.
Let’s say you’re buying a property worth $400,000. A 105% guarantor loan means you get $425,000 from your lender. We’ll plug those numbers into the calculation:
Guarantee Size = $425,000 – (0.8 x 400,000) / 0.75
Guarantee Size = $140,000
This means the guarantor will pay a maximum of $140,000 if the borrower defaults.
Please note – this is just an example calculation. The actual calculation varies. You can find out more by speaking to your lender.
The Risks of Being a Guarantor
Acting as a guarantor does not come without risks. In fact, the guarantor is liable if the borrower defaults on the loan.
Thankfully, most banks will work with borrowers and guarantors to find solutions to such problems. This helps you avoid selling the home in anything but extreme circumstances. Lenders also prefer to find solutions as they may lose money when selling the home.
For example, let’s say you’ve lost your job. Most lenders will prefer to wait things out rather than sell the home. They take the stance that you will find more work soon. In many cases, they may even 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 property 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 even more protection. This is especially important if the sale of the borrower’s house does not cover the loan. In such cases, the guarantor only needs to cover the loan up to the limit.
Let’s take our above example again:
• The loan is $425,000, with a limited guarantee of $140,000.
• If the property sells for $425,000, the guarantor doesn’t have to pay anything.
• Should the property sell for $200,000, the guarantor pays $140,000. However, the guarantor doesn’t have to pay the remaining $85,000.
• A sale price of $400,000 results in a $25,000 payment.
The key is that the guarantor will never pay more than $140,000 in the above example. This figure will vary depending on the size of the limited guarantee. If you place no limit on the guarantee, the guarantor must pay the full debt.
A guarantor could take a second mortgage or personal loan to cover these 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.
Should You Be A Guarantor?
It is crucial that you talk to an expert before making the choice to become a guarantor. In some cases, you can secure a parent assist home loan instead. This will let you help your child without taking on as much risk.
You should ask yourself three questions before becoming a guarantor:
1. Can I trust the person I’m guaranteeing?
2. Can I cover the cost if something goes wrong?
3. What payment conditions do I face?
The last question may require input from a lender.
Frequently Asked Questions
Now you know the basics of guarantor loans, let’s look at some other common questions.
Question: When can I remove the guarantee?
Answer: Most borrowers don’t want a guarantor on their home loans for the entire loan period. Lenders will usually remove a guarantor for you once you meet 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 also 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 will 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.
Question: Can I get a guarantor loan if my parents have retired?
Answer: The majority of lenders will not provide guarantor loans if the guarantor has retired.Those that do will need the guarantor to speak to a legal professional before agreeing to the loan.
Question: Can I get a guarantor loan if my parents have a home loan?
Answer: You can 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 should talk to an expert to find out more.
Question: What if the guarantee needs a second mortgage?
Answer: Do not complete the guarantor loan application until the guarantor has confirmed he or she can get a second mortgage. Make sure the guarantor has received consent for 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 loan application.
Question: Why don’t banks charge LMI on guarantor loans?
Answer: It comes down to the security. Lenders will charge LMI on loans for 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.
Question: Can I consolidate debt into a guarantor loan?
Answer: Some lenders allow you to pull your current debts into a guarantor loan. Bear in mind that lenders have their limits. As a general rule, you can’t consolidate if your debt is over 5% of your home’s value. Some will allow more under special conditions. Even then, it is very unlikely you can consolidate if your debt is over 10% of the home’s value.
Question: What is an 80/20 guarantor loan?
Answer: This is a method of getting a low doc loan with a guarantor. Lenders tend not 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 requires the support of financial professionals. Even then, very few lenders will allow you to do it.
Question: Can I get a 100% guarantor loan for construction?
Answer: You can as long as you are careful. You will need to apply for your construction and land loans at the same time. This is because lenders will not increase a guarantor loan.
Your Next Step
You should talk to an expert if you want to learn more about guarantor loans. With the right help, you can find out more about the available loans. A mortgage broker can also prepare an exit strategy and help you understand the terms attached to the loan.
You can also read about how uno helped a first home buyer purchase a home loan with the help of his mum Christine.