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, by putting 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.
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.
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.
Guarantors are limited to immediate family members. Lenders generally allow siblings, parents, and grandparents to be qualified as a guarantor. Some lenders will also allow ex-spouses and extended family members to be your guarantor. Terms and conditions will vary depending on the lender’s home loan policy.
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.
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 guides on how much someone might be able to borrow from a lender if he or she has a guarantor.
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 a lot easier because someone can purchase a property and cover the cost of stamp duty without having to save any money.
Keep in mind that these are approximate guides only. This may differ depending on the lenders’ policy.
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 an 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.
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 shortfall 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.
It is imperative for a borrower to release its guarantor as soon as possible to remove any risk for the latter, especially if a property was used as security. The portion of the loan that was guaranteed by a guarantor should be in a variable interest rate so that early repayments could be arranged if it is possible and it is strongly recommended to avoid any penalties. The borrower should do what is in his or her power to pay off that portion of the loan as quickly as possible. If the property increases in value this can also provide the equity required to remove the guarantor. The equity should be less than 20% of the property value and the lenders mortgage insurance is generally required to be paid to release the guarantee.
If the portion of that loan is being settled (repaid), the guarantor can be released from his or her commitment. He or she will no longer be bound to any risk because they aren’t attached to the loan anymore.
Common problems encountered by a guarantor is that lenders hold all the power because they are the ones that create the guarantee documents. For example, in most of these types of documents the lenders have no responsibility to substantiate the borrower. It is in default that they will implement the guarantee. In addition to that, most of the lenders write the guarantee documents in such a way that if there are multiple guarantors, they will become joint guarantors so that the lenders can get back the whole loan from a single guarantor rather than the latter being responsible for only a portion of the debt.
Before agreeing to be a guarantor for someone else’s loan, you must make sure that the parties involved are able to repay the loan. You also need to be fully informed or aware about what will happen if the borrower does not meet his or her obligations and how it will have an effect on your financial position. Consulting a professional and seeking for legal advice is the best option for a guarantor. By doing this, he or she will be aware and will know exactly what his or her obligations are to be the guarantor.
According to the agreement, if a borrower is no longer able to make payments, the guarantor will be responsible to pay off the entire amount of the loan including its interest and other fees. This is why it is important for a guarantor to understand the implications of their decision before signing such an agreement or guarantee.
Some people suggest for guarantors to use only investment properties as the guarantee security, this is so that their home is not at risk. By doing this, you will not end up having to sell your home to pay off the debt. Most lenders will require you to sign a document declaring that you understand and agree to all the terms and conditions to be a guarantor and that you have already received independent legal advice from a professional regarding that matter.
Before you agree to be a guarantor for a home loan, you need to speak to a mortgage broker and ask certain questions. Below are the questions you need to ask to a mortgage broker.
You may also want to obtain independent financial advice.
It’s vital for you to get a copy of the loan contract from the lender because it will provide you with critical information such as:
Keep in mind
You should never be pressured or emotionally blackmailed into signing any document, especially if a large sum is involved. It is imperative to seek professional advice so you will be aware of the loan terms and what your risks will be. There have been some cases in which a guarantee has contested a claim, despite the fact that they signed a contract.
You should seek advice right away if:
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