Receiving a helping hand for your new home purchase: The Guarantor loan explained.

Are you currently looking to purchase your first home? Looking to up-size but cannot seem to save for a necessary deposit? A guarantor loan could potentially see you in your new home sooner rather than later. Approximately half of first home buyers receive assistance from their parents to buy their first property according to recent first home owner statistics. Essentially it is the simplest and only achievable way to borrow up to 105% of the purchase price of a new property. Contacting a local Adelaide mortgage broker will assist in working out whether you may be eligible for this type of scenario.

What is a guarantor?

Many lenders will allow a family member (in some cases it does not need to be a relative) to assist you buy your own home by means of providing additional security (their established dwelling). The people who provide such assistance are referred to as guarantors. It must be noted that this is different to being a co-applicant of the mortgage application. A servicing guarantee requires the guarantor to be a part of the mortgage whereby they are responsible for the loan until it is paid down in its entirety. This blog is focusing on a Security Guarantee situation.

A security guarantor is linked to the loan by a guarantee offering additional equity within their home to reduce the overall exposure to a particular lender. When it is solely a security guarantee, the applicants purchasing the primary home must be able to service the entire loan. The primary security for the loan will be the new purchase property; however the lender will also take a new mortgage out over the guarantor’s property. The loan/s will remain in the purchasers names, the guarantors will sign guarantee documents to satisfy the lenders requirements regarding the transaction.

In most cases, the guarantors are the parents of children looking to purchase their first home, but this scenario can be used for people looking to up-size or even people looking to refinance from another financial institution. For further information, seeking the assistance of a local Adelaide Mortgage broker will determine whether you are eligible for one of these guarantor loans.

Advantages of the Guarantor Loan Scenario:

The guarantor option provides an alternative whereby clients are unable to save for a deposit but can still meet the required home loan repayments. Servicing the loan must be solely achieved by the people purchasing the property, however, in a time where it is becoming increasingly difficult to save for a substantial deposit; this option is becoming more and more prevalent.

Quite often lenders will allow the applicant to borrow the full amount of the purchase price plus the government costs. This is a case by case basis depending on the overall strength of the home loan application. Using an Adelaide Mortgage Broker will assist in determining whether this will apply to your individual loan application.

As well as not requiring a deposit to purchase your new home, the guarantor scenario can save you thousands of dollars in Lenders Mortgage Insurance (LMI). It must be noted that this fee covers the lender should you default on your loan and does not cover the borrower for any misdemeanours on the home loan. Generally speaking, LMI is applicable to a loan when you have less than 20% deposit (plus government costs) which results in the loan amount being greater than 80% of the value of the property.

Once the borrowers have built up enough equity in the property they have purchased, the guarantor can request to be released from the loan. This is generally dependant on the original deposit contributed by the purchasers, whether your property has increased in value over time and any extra repayments made into the loan decreasing the loan balance and increasing equity. Fees can apply to remove the guarantor security via a discharge process but generally these are not excessively costly.

Limitations & Implications for the Guarantor:

If the purchaser/s is unable to make the loan repayments according to the terms of the mortgage contract, the lender may take legal action against you and in some circumstances, the guarantor. As a result of this, the guarantor is therefore liable for the amount specified in the guarantee when the loan is set up initially.

This can be applied by the guarantor taking over the loan repayment schedule or handing over a full repayment.

As the guarantor is providing equity from a particular property they own it must be noted that their ability to borrow will be impacted after accepting to act as a guarantor

It is strongly advised that both the applicant/s and the guarantor/s seek independent legal advice when considering the guarantor option. A majority of lenders who offer the guarantor loan will require you to provide evidence of this independent legal advice.

For more information on anything included in this blog or to seek assistance with your finance needs don’t hesitate to contact me.

Matt Penny
0411 110 151