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 your parents assisting you to buy a home.
The idea is for you to get into the property market sooner. 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 with first home buyers having difficulty saving for their home deposit. A family guarantee may allow you to buy without a deposit and some lenders now allow you to limit the size of the guarantee.
What are the names used for guarantor loans?
Every lender seems to have come up with their own name for guarantor loans! St George Bank uses the term ‘Family Pledge’, CBA uses the term ‘Family Support’ or ‘Family Equity’, Rams uses the term ‘Fast Track’ whereas ANZ and Westpac use the term ‘Family Guarantee’.
What are the benefits of a guarantor loan?
Recently, no deposit home loans have been withdrawn from the market which makes guarantor loans the only way to borrow 100% or more of the purchase price.
Guarantor loans have several benefits for you as the borrower:
- You don’t need a deposit, allowing you to buy a home now.
- Save money by not paying an LMI premium
- Discounted interest rates may be available from some lenders
- You can consolidate some minor debts, such as credit cards, when you buy your home.
- You can limit the size of the guarantee.
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 some cases, the bank can take a second mortgage as security.This type of guarantee is most often used when first home buyers with good income are buying a home but with no or little deposit. The guarantor is also called an “equity guarantor” by some lenders.
- Security and income guarantee: A security and income guarantor is most often a parent helping their son or daughter who may assist with the loan repayments to buy their first property. The lender will use the parents’ property as additional security and will rely on a portion of parents’ income to support the loan repayments
- 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 and the lender’s requirements.
How is the mortgage for the guarantee structured?
The loan is secured by both the property that you are buying and the property owned by the guarantor. If you use a limited guarantee then the guarantor can reduce their exposure to your mortgage. The structure is very similar if your parents already have a home loan on their property. The guarantee for your loan is secured using a second mortgage behind their current loan.
What if my parents already have a home loan?
That’s okay. If they have sufficient equity, some 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 guarantor’s property, for example their current home loan plus the new limited guarantee, must be less than 75% – 80% of the value of their property.
Important Information for Guarantors:
If the borrower is unable to pay back the loan according to the terms of the loan contract, the lender can take legal action against the borrower and in some circumstances their guarantor.
A guarantor is liable for the amount specified in the Family Pledge guarantee. Your ability to borrow may be reduced if you agree to act as a guarantor. You will need to read and understand the full terms of the guarantee and seek independent financial and legal advice before accepting the role of guarantor.
Credit Representative Number 496186 is authorised under Australian Credit License Number 389328
Disclaimer -This page/article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.