Having A Guarantor On A Loan. How Do Guarantees Work?
You have taken the decision that you would like to move forward on purchasing a home or an investment property. The next step would be to go about setting up your finance. You can go straight to a lender of your choice, or go and see a Mortgage Broker in Adelaide, like us. There are two basic criteria in getting yourself a home loan out of the many that there are. Having Equity to put down (your deposit, you can read more about how much you need here) and secondly, you need to be able to service the loan. What servicing the loan means is that you can afford it. This is determined by the eventual lender that you choose. What that lender will do is they will take your income, your current liabilities, and your living expenses and run it through there servicing calculator. They will then be able to see if you can afford to carry a loan with your current circumstances. Many other boxes obviously also need to be ticked, don’t get me wrong. Again, though the base two to have ticked are deposit and serviceability.
Where does a guarantor feature in all of this? You may be in the position where you do not have enough deposit to enter into the property market, as you have just entered the working world. It may be that you have some deposit, but not enough to get you over the 80% Loan to Value ratio needed to avoid Lenders Mortgage Insurance. It is also good to note here that at the 80% Loan to Value ratio most lenders will have their prime interest rates too. This is where a security guarantor may be able to help the lucky few, who have access to one. A security Guarantor is usually a direct family member ie brother, sister, father or mother. What it means for them to go on your loan as a security guarantor is that they will use their home or investment property (so long as it has enough equity in it) to supply you with the deposit and sometimes even government fees you require to buy your property. To clarify how this works on paper, here is an example. Let us assume that you would like to purchase a home and it has a value of $500000.00. In order to purchase that property, you would need to have a 20% deposit and then roughly a further 5% for government fees. Mum and Dad have their home that is worth $1000000.00, and they have a mortgage on it with another bank that has a balance of $600000.00. For you to buy the property that you want, you need a total of $125000.00 to cover your part of the deposit and government fees. At present, you do not have this, so Mum and Dad agree to go Guarantor on your loan. This means that a lender, that accepts a security Guarantor will loan you 105% of the purchase price of the property. So that is the full $500000.00 plus the $25000.00, provided of course you can show servicing for the full amount. What Mum and Dad have essentially said by signing as a guarantor to your loan is that they will put their house up as security for the $125000.00 that you would normally have to have.
For this, to work, the Guarantors will usually have criteria that will need to be met. Each lender is different in regard to this. Here is where a good mortgage broker Adelaide will assist in pairing you with the right lender. The main thing to look at is that the guarantor has enough equity in their property to be able to offer up to the incoming bank as security. The second thing to check would be to see that the lender that the parents are with will accept the incoming bank, going second mortgage behind the guarantors’ bank. Again, this is where your mortgage broker Adelaide can help. In the instance above the Guarantors, property is worth $1000000.00, and their outstanding loan is $600000.00. Many lenders that still allow a Guarantor loan will allow the guarantors to go up to the 80% LVR. In this case, it means that the incoming bank could use the equity in the above property to $800000.00. Meaning there is $200000.00 of equity and the $125000.00 that you as a borrower needs will fit within that. At present this is a very oversimplified example and there are quite a few more factors to be considered. For the purposes of understanding how a guarantor loan works though, this example will fit the purpose.
The most important thing to consider about a guarantor loan is that it is right for the guarantors. The only time that that is when they would like to become a guarantor under their own free will, and there is no pressure on them to do so. The guarantors also need to understand fully what is at stake, should the loan for the applicant take a turn for the worse. There have been many instances where guarantors have been taken advantage of by family members and lost their home. This is one of the topics that was also covered by the Royal Banking Commission. Therefore, there is now so much red tape around these types of Loans, with most lenders requiring that guarantors seek independent legal and financial advice. If the new applicants fail to pay their home loan and the bank starts proceedings against them, the next place that they will come looking for the section of the loan covering the 25% we talked about earlier are the guarantors. They will expect them to pay that section of the loan and failing that if they can’t get back the full proceeds from the property bought, they might want to sell the guarantors home. So, while a guarantor Loan is a good way of avoiding Lenders Mortgage Insurance, as well as attaining prime interest rates on a loan, there is a lot at stake. The only way to progress with these loans would be, responsibly.
The second type of Guarantor loan would be a servicing one. This is where the Guarantor is also responsible for the servicing of the loan. These no longer really exist, except in the case of a spousal guarantee. A spousal guarantee is where the income of a spouse will be used in the servicing of a loan and they are responsible too for the repayments, however, they are not on the title of the property. This is normally done for asset protection. It must be shown though, that the guarantor is getting some sort of benefit out of the property.
When looking at these types of loans. I would highly recommend that you have a mortgage broker on your side. I would also highly recommend that guarantors seek financial and legal advice, before entering into any contracts. If you are looking for a good Mortgage Broker in Adelaide, please get in touch today.