Guarantor Home Loans
You can borrow between 100% and 110% of a property’s value.
Understanding Guarantor Loans
In a guarantor loan, a family member, often your parents, provides a guarantee secured against their property to support your home loan. This arrangement is designed to expedite your entry into the property market.
The primary goal is to facilitate your home purchase sooner. As you make progress in repaying your loan or as your property appreciates in value, you can request the removal of the guarantee.
Guarantor loans have gained popularity due to their cost-effectiveness compared to standard home loans. They enable you to buy a home without a deposit, and some lenders now offer options to minimize the size of the guarantee.
Understanding Mortgage Structure for Guarantees
The mortgage for a guarantee is a dual security arrangement, utilizing both the property you’re purchasing and the guarantor’s property. It’s a straightforward setup, and if you opt for a limited guarantee, the guarantor can minimize their exposure to your mortgage. If your parents already have a home loan on their property, the structure remains similar. Your loan’s guarantee is secured through a second mortgage, positioned behind their existing loan.
Determining the Guarantee Limit
For most guarantor loans, we request that the lender limits the guarantee secured on the guarantor’s property. This means the guarantor is responsible for a portion, not the entire loan amount.
The calculation for the limited guarantee size follows this formula: Limited guarantee size = (Loan Amount – (0.8 * Purchase Price)) / 0.75. For example, if you’re buying a $500,000 property and borrowing $525,000 to cover expenses like stamp duty, the calculation would be ($525,000 loan amount – (0.8 * $500,000 purchase price)) / 0.75, resulting in a limited guarantee of $166,700 (rounded to the nearest $100).
To simplify the process, our guarantor loan calculator can handle these calculations for you.
Types of Guarantees
Security Guarantee: This type involves the guarantor using their property as additional loan security. If the guarantor already has a property loan, the bank typically takes a second mortgage as security. It’s commonly employed by first-time buyers with a strong credit history who lack a deposit. Some lenders may refer to the guarantor as an “equity guarantor.”
Security and Income Guarantee: A security and income guarantor, often a parent, assists a student or low-income son or daughter in purchasing their first property. In this case, the lender relies on the parents’ property as additional security and their income to establish loan affordability.
Family Guarantee/Parent Guarantee: This arrangement involves guarantors who are directly related to the borrowers, often referred to as a “parental guarantee” by banks. While parents are common guarantors, other family members, like grandparents or siblings, are considered on a case-by-case basis.
Limited Guarantee: A limited guarantee ensures that only a portion of the loan is guaranteed by the guarantor. This approach is typically used with security guarantors to reduce the potential liability associated with the guarantor’s property. The decision to offer limited or unlimited guarantees depends on both the guarantor’s preferences and the lender’s criteria.
FAQs About Getting A Home Loan With A Guarantor
A guarantor home loan is a type of mortgage where a family member, often a parent, uses their property as collateral to secure your loan. This allows you to borrow a higher percentage of the property’s purchase price, typically between 100% and 110%, without a significant deposit.
Your guarantor provides a guarantee for your home loan by securing it with their property. This helps you enter the property market sooner. Once you’ve paid off part of your loan or your property’s value has increased, you can apply to remove the guarantee.
Typically, guarantors are family members, such as parents or, in some cases, other close relatives. Their property is used as security to support your home loan. The specific eligibility requirements may vary between lenders.
Guarantor loans offer several advantages, including the ability to buy a home with no deposit, savings on Lenders Mortgage Insurance (LMI) premiums, potential access to discounted interest rates, the option to consolidate minor debts, and the ability to limit the size of the guarantee, reducing the exposure of your family member.
There are several types of guarantees in guarantor loans, including security guarantees (commonly used by first-time buyers), security and income guarantees (suitable for those with low incomes), family guarantees (covering a range of family members), and limited guarantees (which protect only a portion of the loan amount). The choice depends on your circumstances and the lender’s requirements.
The amount you can borrow through a guarantor loan depends on your borrower type and the purpose of the loan. First-home buyers may access up to 105% of the property value, while investors can secure up to 105% of their investment property’s value. Debt consolidation and purchase loans may go up to 110% of the property value. Borrowing over $1,000,000 may involve additional credit requirements.
FAQs About Being a Guarantor on a Home Loan
A guarantor on a home loan is a person, often a family member, who offers their property or assets as security to help another individual secure a home loan. The guarantor’s assets act as collateral for the borrower’s loan, reducing the need for a significant deposit.
The primary responsibility of a guarantor is to provide security for the borrower’s home loan. In the event that the borrower defaults on the loan, the guarantor may be required to cover the outstanding debt. Guarantors should be aware of the potential financial risk they are undertaking.
Typically, guarantors are family members, such as parents, but some lenders may consider other close relatives or even friends. The specific eligibility criteria can vary among lenders.
The duration of a guarantor’s obligation varies between lenders and loan agreements. Some guarantor arrangements are in place until a certain amount of the loan is repaid, while others continue until the borrower meets specific criteria, such as reaching a particular loan-to-value ratio.
Yes, in the event that the borrower defaults on the loan, the guarantor’s assets, which were used as collateral, could be at risk. It’s crucial for guarantors to understand the potential financial exposure when agreeing to this arrangement.
Guarantor Home Loans FAQs
A guarantor home loan is a type of mortgage where a family member, typically a parent or close relative, uses their property or assets as collateral to help another individual, often a first-time homebuyer, secure a home loan. The guarantor provides additional security to the lender, reducing the borrower’s need for a substantial deposit.
Guarantors are usually family members, such as parents, but some lenders may consider other close relatives or even friends. The eligibility criteria can vary between lenders, so it’s essential to check with the specific lender regarding their requirements.
The primary benefit of a guarantor home loan is that it allows borrowers to enter the property market with a smaller or no deposit, making homeownership more accessible. It can also help borrowers avoid paying lenders mortgage insurance (LMI) and potentially secure lower interest rates.
Guarantors take on financial risks by offering their property or assets as collateral for the borrower’s home loan. If the borrower defaults on the loan, the guarantor may be required to cover the outstanding debt, potentially putting their own assets at risk.
Case Studies
Scenario: John is a first-time homebuyer who has found his dream home but lacks the necessary down payment to secure a mortgage. He is concerned about paying high lenders mortgage insurance (LMI) and higher interest rates. His parents, Sarah and Michael, are willing to help him by becoming guarantors.
Solution: John decides to explore the option of a guarantor home loan. With the support of his parents, he can secure a home loan without a substantial down payment. This allows him to avoid LMI costs and potentially access lower interest rates. However, he is aware of the risks involved and has an open discussion with his parents about their responsibilities as guarantors.
Over time, as John pays down a portion of the loan and the value of his property increases, he becomes eligible for a release of the guarantor. The guarantor’s liability is limited to a portion of the loan, and John works diligently to meet the criteria for his parents’ release from the loan, reducing their financial exposure.
Scenario: Emily, a recent college graduate with a low income, aspires to invest in her first property. Her parents, Rebecca and David, are financially stable and want to support her by becoming guarantors on her investment property loan.
Solution: Emily decides to explore a guarantor loan to invest in her first property. Her parents’ involvement enables her to enter the property market without a substantial deposit. The security and income from her parents improve her borrowing capacity, making the investment property more accessible.
Rebecca and David understand the potential risks of becoming guarantors and are comfortable with their roles. They provide their property as additional security and use their income to support Emily’s loan application. Emily’s responsible financial management, coupled with the property’s rental income, helps cover the mortgage repayments.
As Emily’s investment property appreciates in value and her financial situation improves, she eventually refinances her loan to remove her parents as guarantors. This process allows her parents to reduce their financial involvement and enjoy greater peace of mind while supporting their child’s investment endeavors.
How Can We Assist You in Obtaining Approval?
Our expertise lies in guarantor-supported home loans, and as mortgage brokers, we’re well-versed in this specialized area. We conduct a swift assessment of your specific circumstances to identify lenders willing to approve your application and determine the most cost-effective loan options.
We go the extra mile by offering complimentary services, such as timely reminders regarding the potential removal of the guarantee. Moreover, we engage in open discussions with the guarantor to ensure their complete comprehension and comfort with the proposed loan structure.
If you’d like to consult with a dedicated mortgage broker who specializes in guarantor-supported lending, please don’t hesitate to reach out to us. You can contact us online or call us at 1300 401 847.
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