One of the last ways to buy a home with no deposit or LMI charges
If you're not able to save up a deposit, or wish to avoid paying Lender's Mortgage Insurance (LMI), a guarantor can help.
A guarantor is a person such as your parents or close family member who assumes responsibility of paying off the loan, if you're no longer able to meet their financial commitment. Essentially, the guarantor takes financial responsibility for servicing the home loan in the event that you default on your repayments. This lowers your risk as a borrower, which allows your bank to lend you as much as 100% of the purchase price of a property.
Comparison of home loans available with a guarantor
The table below can be used to compare home loans which allow guarantors. Sort through products using the table headings based on annual percentage rate (interest rate), comparison rate (comp rate), or fees. You can also compare loans side by side by checking the box next to the loans you're interested in and then clicking 'compare'. Next, to find out more about a loan you can click 'More info' and to enquire with a lender directly click 'Go to Site'.
The table below can be used to compare home loans which allow guarantors. Note that the loans in the table below have maximum LVRs of 95%. Loans with LVRs above this using a guarantor may have different conditions, rates or fees.
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If a borrower doesn’t have a large enough deposit saved to qualify for a home loan, or if a lender is not convinced of the borrower’s ability to repay a loan, the lender may ask for a “guarantee” on the loan. This guarantee usually comes from the borrower’s parents, which means the parents allow the equity in their home to be used as security for the loan.
Traditionally, the guarantor would use their property as security on the entire loan amount. Otherwise, they can limit the guarantee to a portion of the mortgage, for example 20%.
With a guarantor home loan, the borrower can borrow 100% or even 110% of the property purchase price, allowing them to avoid the cost of lender’s mortgage insurance (LMI) and also pay some of the other expenses associated with buying a home. This gives first homebuyers a great opportunity to get a foothold in the property market.
Guarantor home loans are also referred to as family pledge home loans or family guarantee home loans, and while they’re available from many banks they’re not offered by all lenders. Ask a trusted mortgage broker to help you compare and choose guarantor home loans.Back to top
The property being purchased as well as the property the guarantor owns will be used as security for the home loan. It is a relatively simple structure and if a limited guarantee is requested, the guarantor will be exposed to a lower degree of risk.
Lydia and Ryan
For example, Lydia and Ryan are getting ready to purchase their first home. They searched the market and found a property they wished to purchase. The price of the home in question (property A) was $500,000 and while they could easily make the repayments on an even larger loan, they didn’t have cash required to cover the 5% deposit the lender demanded. Lydia’s parents, however, were willing to help them and go guarantor. Since they had already paid off their home in full, which was worth approximately $1,000,000 (property B), things went relatively easily.
The loan Lydia and Ryan needed was $525,000, which included the purchase price, stamp duty and the legal fees. The two properties, worth $1,500,000, were put up as security, which meant a loan to value ratio of 35%. The Joneses were able to easily obtain the loan, thanks to the help of Lydia’s parents and they saved quite a few thousand dollars as they didn’t have to pay for mortgage insurance.
Some other names for guarantor loans
Different lenders call guarantor loans different things, such as family pledge loans, fast track loans, family guarantee loans and so on.
Family Pledge Loans
With a family pledge loan, a member of the borrower's family can use the equity in their personal property as added security for part of the loan. This way, the loan to value ratio is lower, which can lead to extensive savings as the Lender's Mortgage Insurance no longer applies, as long as the LVR is less than 80%. This way, someone can buy a home faster with the help of their family.
Thus, by increasing the value of the security through the help of a family member, a borrower may be able to, at the very least, reduce the premium they have to pay for LMI, which is usually charged on a loan with an LVR above 80%. However, a guarantor has the option of specifying an amount they are willing to put up security for, so the guarantee they are putting up can be limited, as long as the lender approves, of course.
Note that while a borrower can choose the home loan that is best suited to their circumstances, the lender has to approve the request for a guarantor.
Family Guarantee Loans
A family guarantee loan is designed to help people purchase a home quicker and more easily with the help of family members. This type of loan can be used to purchase a home or, in some cases, as an investment in another residential property.
Thus, a family guarantee loan lets the borrower use the equity in the homes of certain family members as security against part of the total loan. As a result, the borrower might be able to purchase a home faster and even save money by not paying for LMI and could also mean they might be able to borrow more since they can finance 100% of the value of the property as well as additional costs such as legal fees and stamp duty.
There are a wide range of great home and investment loans that will also accept a guarantor from various lenders, but to find them, you might need the help of a professional who has been in the business for a while. Generally, you will find that only close family members will be accepted such as parents, step-parents and parents-in-law, though is some limited cases, grandparents and siblings might also be an option. The advantage with this type of loan is that the guarantor can decide how much of the loan they will provide security for, since it doesn't have to be for the full amount.
Fast Track Loans
A borrower could save thousands of dollars in mortgage insurance and buy their home much faster with the help of their family, which is priceless, especially when they are willing to be guarantors. With fast track loans, the guarantor is generally limited to being a parent of the borrower. The latter needs to offer security under the guise of a registered mortgage over their home or another property for any amount that exceeds 80% of the purchase price of the home. This way, a borrower can get a loan that exceeds the total purchase price of the home but they won't have to pay mortgage insurance.
The benefits to the borrower are quite clear. First of all, there is no need to save up money to cover the deposit and one can access up to 120% of the full value of the property. Some lenders will even add the upfront costs but this amount needs to include debt consolidation and home improvements. Otherwise, one can get up 110% of the property value if they are only opting for home improvements or debt consolidation and up to 105% if the money will only be used to purchase the property and cover the upfront costs.
As with all other types of guarantor loans, the borrower can save on mortgage insurance since they won't have to pay thousands of dollars as a premium for something that offers them no benefit whatsoever.
Generally, these loans are available for the purchase of a home or for investment reasons, but not if you want a line of credit or are applying for a self-employed low doc loan. They can also be used for construction but only in cases where debt consolidation and home improvement is not part of the package.
The guarantor also has a few benefits such as only being responsible for the limited amount agreed on as guarantor for, instead of the whole loan as well as a few expenses that the lender might incur in enforcing the agreement. Additionally, as a guarantor, you are not responsible for the monthly repayments and you can submit an application to be released at any point in time. The lender will decide whether they agree to lift the guarantee based on the LVR and other criteria.
If the lender isn’t convinced that the borrower will be able to repay the loan, whether it’s because they lose their job, fall ill or are injured, then they are likely to require the signature of a guarantor. This way they have a backup so they can recoup their money if the borrower is no longer able or willing to make the payments. Thus, generally people with little to no credit history, low incomes or young people are often required to have a guarantor if they want to take out a loan.
With a regular home loan, if you have a loan deposit below 20% of the property's value, you'll have to pay Lender's Mortgage Insurance (LMI). In the example below, the borrower has a deposit equal to 5% of the property value, and the bank loan is therefore for the outstanding 95%.
With a guarantor loan, you provide your deposit (or no deposit), and your guarantor puts forward an agreed portion of their property as security, allowing you to go into the loan with a larger deposit, and if your deposit is 20% or above, avoid Lender's Mortgage Insurance (LMI). In the same example as above, the guarantor has agreed to provide security for 15% of the property's value, giving the borrower a total deposit of 20%. The borrower in this example could now avoid paying LMI, and their guarantor would be responsible for the agreed portion until that amount has been paid back by the borrower.
While requirements will differ from lender to lender as well as the amount that can be borrowed, below you will find an approximate guide to how much someone might be able to borrow from a lender if they had a guarantor.
- Guarantor loans for the first home buyer: 105% of the value of the home.
- Guarantor loan for construction: 105% of the cost of construction and value of the land.
- Guarantor loan for refinancing purposes: 100% of the value of the property.
- Guarantor loan for debt consolidation and purchase: 110% of the value of the property.
- Guarantor loan for investments: 105% of the value of the property that is to be purchased as an investment.
The majority of lenders won’t give out more than 100% of the cost of purchasing the property even if there is a family guarantee or they may ask that the borrower put down a small deposit. However, some lenders will gladly offer 105% of the price of the property, which can make life a lot easier because someone can purchase a property and cover the cost of stamp duty without having to save a penny. Remember, these are approximate guides only.Back to top
Lending criteria for loans involving a guarantor are somewhat different from those of a normal home loan. This is because lenders are exposing themselves to additional risk by working with someone who is not directly borrowing the money, even if having a guarantor actually lessens the degree of risk to the lender since there is someone else who will cover the loan if the borrower defaults.
Listed below are some common cases that banks aren’t all that happy about accepting:
Buying for investment? Loans for investment purposes with a guarantor are only accepted by two or three banks in Australia, as the majority feel that if a borrower wishes to invest, they should have a stable enough financial position to support the loan on their own. Additionally, an investment property should be producing sufficient income to cover the loan, so a bank might question a person's investment knowledge, which is another strike against the borrower.
Buying a second home? Any borrower purchasing a second home is going to have a tough time finding a lender willing to give them money on a loan supported by a guarantor because they feel that anyone purchasing another property should be financially sound enough to make the purchase on their own. Even with first home buyers things can get sticky because a lender is liable to ask how someone who is unable to put down a deposit for a house can possibly pay off a loan. This is why it is often a good idea for homebuyers to seek the advice of an expert who can guide them towards lenders who aren't as picky when it comes to assessing guarantor loans.
Debt consolidation? There aren't a lot of lenders who will permit a borrower to purchase a home and consolidate personal debts, such as credit cards, on the same loan. There are certain lenders who will accept a loan that covers the purchase price plus some extra funds for debt consolidation but the money that goes towards paying off personal debts cannot amount to more than 10% of the purchase price. Additionally, the borrower in question needs to have an impeccable track record of paying on time, every time, before a lender will even consider it. Finding these lenders and setting up the loan can be complicated, which is why it is generally advisable to seek the counsel of a professional.
Does the borrower have savings? Even with a guarantor loan, which usually means one can borrow 100% of the value of the property, some lenders will still require the borrower to provide proof they have enough money saved up to cover at least 5% of the purchase price of the property. An expert will be in a better position to guide any borrower towards lenders who do not have this requirement.Back to top
Generally, the borrower wants to do everything they can to release the guarantor as soon as possible to remove any risk for the latter, especially if a property was used as security. This is why it is generally recommended that the portion of the loan that was guaranteed by a family lender is under a variable rate so that early repayments can be made – if it’s possible – without any penalties being involved. Thus, the borrower should do everything in their power to pay off that portion of the loan as quickly as possible and must try to achieve this within the first five years or less.
When that portion of the loan has been repaid, the guarantor can be released and there is no longer any risk for them because they aren’t attached to the loan anymore. This will make everyone involved happy. It can also be quite motivating to have this large amount to pay off and it can be extremely satisfying once success is achieved.
Generally, a guarantor needs to be someone who is an immediate family member and is usually a parent but most lenders will also accept brothers, sisters or grandparents. While the requirements will differ from one lender to the next, a small percentage will accept a former spouse or an extended family member to sign as a guarantor. For example, some banks will only accept guarantees from the borrower’s parents while others might be willing to accept a sibling, spouse, de facto partner, grandparent or even an adult child as a guarantor. The idea is that the lender wants to ensure there is a strong relationship between the borrower and the guarantor, which makes it more likely that the guarantor will pay the loan off in the event the borrower is unable to.
In most cases, if the guarantor is not an immediate family member of the borrower, the latter will have to show evidence of some savings to prove financial stability. It’s also quite likely that the borrower will only be able to borrow at most 100% of the value of the property.Back to top
The problem with being a guarantor is that guarantee documents are created by the lender in such a way that they hold all the power. For example, in most of these types of documents, lenders have no obligation to prove the borrower is in default before they enforce the guarantee. Additionally, many lenders also write them up in such a way that if there are multiple guarantors, they become joint guarantors so that the lender can recoup the whole loan from a single guarantor rather than the latter being responsible for only a portion of the debt.
Before accepting to be a guarantor for someone else’s loan, you need to make sure that the party in question is able to repay the loan and will do so. You also need to be fully aware of what will happen if the borrower does not meet their obligations and how it will affect your financial position. The best option is to get professional legal advice in order to ensure you know exactly what your obligations are as a guarantor. If the lender is responsible, it is likely this step will be a requirement.
Legally speaking, as a guarantor, if something happens and the borrower is no longer able to make payments, then you are responsible to pay off the guaranteed amount, the interest and the fees. The problem is that you might think that it can’t happen to you. You’re guaranteeing your son or daughter’s loan and they won’t bail on you. However, you have to remember that anything can happen and even if they don’t want to default on their loan, they may lose their job, end up in an accident or any number of other things could happen that could land you with a large loan to pay off on their behalf.
While having a guarantor can make life a lot easier and cheaper for the borrower, it can lead to complications for you. For example, if a family member wishes to purchase a property worth $400,000 but they only have 10% of the property’s value to put down as a deposit, he or she would have to pay mortgage insurance to be able to get a loan with an LVR of 90%. If you agreed to act as guarantor and use the equity in your property as security for the remaining $40,000, then the person in question would no longer need to pay the mortgage insurance fee.
Usually, it is recommended that guarantors only use investment properties as a guarantee, so that their home is not at risk. This way, if the worst were to occur, you wouldn’t end up having to sell your home to pay off the debt. With most lenders, you will also be required to sign a declaration that you understand what it means to be a guarantor and have received independent legal advice regarding the matter.Back to top
Approval as a guarantor by a lender depends on a number of things and the criteria can differ from one lender to the next. However, generally, a guarantor will be approved as long as they can provide proof of sufficient income and are offering enough equity to cover the amount they are guaranteeing. Of course, the guarantor also has to be a close family member of the borrower.
Note that before a guarantor will be approved, he or she must seek independent legal advice to ensure they understand all the risks involved and what their responsibilities are. Likewise, they must read and understand all the documentation offered by the lender, which often includes documents connected to the loan and borrower.
Second mortgage? If the guarantor already has a loan against their property, most lenders will not accept a second mortgage as a guarantee. However, if the borrower uses the services of an expert, they have a better chance of finding a lender that will consider it, as long as the property in question has enough equity to cover the security needed.
Elderly guarantors? Most Australian lenders will not even discuss being a guarantor who is over the age of 65, let alone accept security from them. However, there are some who will accept a guarantee from a self-funded retiree or a pensioner but you usually have to speak to a professional to discover who those lenders are and to get help with the application to increase your chances of getting the loan approved.
Weighing the risks
Agreeing to go guarantor on a home loan is a calculated risk. Here are some of the things to keep in mind:
|Opting for a guarantor home loan puts your family home at risk so you need to be comfortable that your family member is in a position to service the repayments in the event that you default on the loan.||Going guarantor can help your family member access the property market sooner|
|With a variable home loan, you run the risk of rising interest rates which could make your repayments more expensive.||Going guarantor can help your family member avoid paying Lender’s Mortgage Insurance (LMI)|
|A breakdown of the guarantor agreement could strain family relationships.||Going guarantor can increase your family member’s borrowing capacity|
|Going guarantor can help your family member gain access to a wider range of loans|
Top five tips for going Guarantor
- Make sure you are fully aware of your own financial situation and that of the person you are considering going guarantor for because the last thing you need is to have to pay someone else's loan off. If it does come to that, you also need to make sure you can afford to make the payment, so think well before you agree.
- Consider your relationship with the person borrowing the money. The closer you are, the more likely it is that you won't have any problems or if the worst does happen, you stand a better chance of recovering your money.
- Get independent legal and financial advice to make sure you fully understand what this process entails and how it will affect your financial situation.
- Ensure you can cover the monthly repayments without outside help before you commit.
- To further reduce your risk exposure, make sure the loan is not more than 90% of the total value of the property.
If you’re considering securing a guarantor, or considering going guarantor for someone else, the most important thing you can do is seek expert advice. There are a lot of lenders that offer loans with guarantors and these loans can be called any number of things. A wide range of factors need to be analysed when one applies for such a loan:
What you need to know about going guarantor
Obtaining approval: The global financial situation has led to lenders being more cautious than ever and that applies even more to guarantor loans. This is where an expert can help because they will know which lenders will be willing to work with a certain borrower and what types of guarantees they will accept.
Be aware of the terms and conditions: Some lenders offer terms and conditions that are relatively simple on guarantor loans and even permit the borrower to put a cap on the amount being guaranteed. On the other hand, there are plenty of lenders who demand that the guarantor be responsible for the entire amount, which could lead to them losing their home. Again, an expert could direct a borrower to a lender who won't demand a guarantee for the whole amount as they are more experienced in working with various lenders and know what they will and won't agree to.
Exiting as a guarantor: Even if the loan is for 30 years, that doesn't mean the guarantee needs to be in place for the entire duration. An expert can help a borrower come up with a strategy to pay off the portion of the loan that is guaranteed or to refinance so that the guarantor can be released within two to five years.
Guarantor protection: There are ways for a borrower to protect the guarantor from losing the roof over their head and even from having to pay the loan by taking out insurance. An expert will be able to provide advice and show a borrower how this is accomplished so that the guarantor is exposed to less risk.
If a borrower doesn’t set up their home loan correctly, they could be creating even more risk for their family members who are putting themselves out on a limb as guarantors. And what’s worse is that they may not be able to get the guarantor released as quickly as they would wish, which is why it is imperative to seek the advice of an expert.
You can get expert advice about guarantor home loans from an experienced mortgage broker. A broker will be able to help you find the right loan for your situation. Brokers are free to you as they receive a commission from your lender.
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Common questions about going guarantor
What loan type am I going guarantor for?
Try to be cautious about offering up a guarantee for a loan like an overdraft that has no set timeframe in which it has to be paid back because you might find yourself as a guarantor for an eternity.
What do I look for if someone asks me to go guarantor for a business loan?
You need to learn everything you can about the business in question, including taking a good look at the business plan. This way, you will have a good idea of how the business will work. Also make sure to get a look at the company's financial statements to ensure that is financially healthy. Even better, speak to the company's accountant to get a more accurate picture.
Am I guaranteeing the entire loan amount or just a portion of it?
You should only guarantee a certain amount of the loan, which will ensure that you know how much you might be liable for at all times. If you sign for the whole amount, this means you will be liable for everything the person borrowing owes right now but also any other debt they accrue in the future on this loan, including interest, fees, penalties and other charges. You should seek legal counsel immediately if the amount in the documents is greater than the sum you agreed to guarantee.
How much am I going to be supporting as guarantor?
The papers you sign as a guarantor should provide accurate details regarding the amount of money you are liable for as well as how this sum is calculated. If you do not think you can cover the amount or simply think it is too much, ask for a reduction.
Are my assets required as security?
You might have to offer up an asset like a home as security if the loan is for any other purpose than domestic, household or personal. In other words, if the borrower defaults on the loan, the lender has the right to take your home and sell it to recoup their money.
What information should be in the loan contract?
You should get a copy of the loan contract from the bank or lender because it will provide you with important and accurate information such as:
- How much the loan is
- The rate of interest, fees and other costs
- Whether or not it is a secured loan, meaning whether or not the borrower had to offer an asset up as security, like a home or another type of property
- The timeframe in which the loan has to be paid off
- How much the monthly repayments are.