Guarantor home loans
What is a Guarantor home loan?
There are different types of guarantor home loans however the usual type is a security guarantor home loan. This relies on another person(s), usually a family member, to be to put up their property or another asset such as a cash term deposit as security for the loan. This allows the borrower to borrow 100% (or more in some cases) of the property value.
What is a guarantor?
A guarantor is a third party that will help you in acquiring a home loan. The home loan guarantor will offer additional security support to lenders for you to secure a home loan. Generally they are spouses or immediate family members.
Who needs a guarantor for their home loan?
For some cases, the lender is not convinced about the credibility of the borrower to be able to repay the home loan and or they do not have enough deposit for usual lending. To approve the home loan the lender requires a guarantee. The guarantor will assure continuation of payment if the borrower will not be able to fulfill the agreed terms for the home loan and/or provide an asset as security. For people without a deposit or with low income, little to no credit history such as young people it can be a way to apply for a home loan.
Who can be a guarantor?
Guarantors are limited to immediate family members. Some lenders may allow siblings, parents and grandparents can be qualified as a guarantor. Some lenders will also allow ex-spouses and extended family members to be your guarantor. Terms and condition will vary depending on the lenders home loan policy.
How do Guarantor home loans work?
The guarantor will allow the borrower to use his or her property as the equity to be used as additional security for the home loan. The primary security of the home loan is the borrower’s property but the lender has the authority to take a mortgage over a guarantor’s property. The guarantor’s mortgage will not directly support the loan, it will be used as an additional guarantee for the lender.
How much can you borrow with a guarantor?
Requirements for a Guarantor home loan will vary from lender to lender as well as the allowable amount that can be borrowed. Below are the approximate guide on how much someone might be able to borrow from a lender if he or she had a guarantor.
Guarantor home loans for the first home buyer:
- Guarantor loans for the first home buyer: 105% of the value of the home.
- 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.
Majority of the lenders won’t allow more than 100% of the cost of purchasing the property even if there is a family guarantee or else they may ask that the borrower pay a small deposit. However, there are some lenders that will appreciatively allow 105% of the price of the property, which can be convenient and lot easier because someone can purchase a property and cover the cost of stamp duty without having to save a any money.
Keep in mind that these are approximate guides only. This may differ depending on the lenders’ policy.
How is the mortgage for the guarantee structured?
The property being acquired as well as the property the guarantor owns will be used as security for the guarantor home loan. It can be structured as unlimited and limited guarantee. If the guarantor chooses to sign for a limited guarantee then he or she will be exposed to a lower degree of risk.
What are the types of Guarantee?
Security and Serviceability Guarantee – It is the ability of the borrower to settle the agreed home loan repayments, based upon the borrower’s loan amount, his or her income, commitments and other expenditures.
Family Guarantee – A member of your family can use their own home's equity to provide additional security for a portion of your home loan amount. This solution decreases your loan to value ratio and can also save you a substantial amount of money by dropping or even removing the need to pay Lender's Mortgage Insurance. So you get into your home faster with the help from your family.
Parental Guarantee – Your parents will be the guarantor for your home loan and they will cover any short fall or loss that the bank may incur. This can be by way of a security or serviceability guarantee, but generally, it is a security guarantee.
Unlimited and limited Guarantee – Lenders who have an option for unlimited guarantee are making your parents responsible for the full amount of the home loan. While limited guarantee is for a static chosen amount. The amount is usually required to bring the loan below a Lenders Mortgage Insurance (LMI) but maybe less and it is your guarantor’s discretion or choice.
Debt consolidation Guarantee – This combines the consolidation of debts with the purchase of a property using a Guarantor. Usually the debts being consolidated cannot be more than 5% of the purchase price. So including stamp duty the total amount borrowed can be 110% of the purchase price. Only some lenders will consider this in rare cases with strict conditions.
Personal Term Deposit Guarantee – The Guarantor’s bank term deposit is used to guarantee part of the loan instead of property. This is a type of security guarantee and is generally used when the borrower is looking to borrow close to 100% of the purchase price. This is good for a guarantor that has the cash available but does not want to put their home at risk.
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