Because no-deposit home loans are no longer available in Australia, guarantor loans have become the only way you can get a mortgage without a deposit. This, in turn, opens the doors of the housing market to thousands of borrowers each year who would have otherwise not been able to purchase a home.
Here’s a quick look at what you stand to gain from this type of home loan to help you decide if applying for one is right for you:
- You can save money because you won’t have to pay LMI with a guarantor loan.
- You can enter the market now instead of having to wait until you’ve saved a large enough deposit.
- With guarantor loans, you can consolidate some of your credit card debts, which can help you save money on interest and simplify your finances.
Guarantor loans also offer some flexibility for the person acting as the guarantor. It’s possible to limit the size of the guarantee. With a guarantee limit, you can somewhat tailor the financial agreement to suit you and your guarantor’s needs.
Do You Need Savings When You Apply for a Guarantor Loan?
While you don’t need a deposit, demonstrating savings can still help you qualify for a mortgage. Here’s the thing: lenders are going to look at your asset position relative to your income when they assess your borrowing capacity. If you don’t have the expected asset position for your income level, the bank may decline your application because you weren’t able to meet their credit scoring criteria, even if you have a guarantor.
Also, some lenders will want to see at least 5% of the purchase price in genuine savings. This will be money you have saved yourself.
Don’t panic if you don’t have 5% of the purchase price sitting in a savings account. The reality is, especially if you are a younger borrower and have only been working for a few years, you may have had other financial priorities to deal with, like buying a car or paying for your education, your wedding, or a little travelling, and you haven’t had the chance to save enough money yet.
There are some lenders who are more flexible and won’t need to see a genuine savings in order to approve your guarantor loan application.
Contact us today and we can talk to you about lenders that don’t require a genuine savings or who have more flexible lending criteria for guarantor loans.
What About Borrowing More Than 105%?
If you have credit card debt, it makes sense to consolidate the debt when you get a home loan. Mortgage rates tend to be far lower than credit card rates so you’ll save by shifting your credit card debt to the lower rate.
But, in order to do this, you’ll need to borrow more than 100% of the purchase price. In the past – before the Global Financial Crisis and tightening regulations on banks – it was normal for lenders to let people borrow 120% of the purchase price when taking out a guarantor loan. Today, some banks will lend 110% at the maximum, while others will only lend up to 105%. The money over the purchase price can be used to pay for things like purchasing expenses and credit card debt.
Here’s the catch. Lenders will only allow you to borrow this much if you are in a relatively strong financial position anyway. As a general rule of thumb, if you want to borrow 105% or 110% with a guarantor loan, your total debts should not be more than 5% to 10% of the property’s purchase price.
Can a Guarantor Loan Be Used for an Investment Property?
With the spike in housing prices in Australia over the last few years, some first-time homebuyers have decided to take a roundabout strategy to home ownership: being an investor first. When you buy an investment property, you can benefit from the rental income while you are still paying rent in your own rental, until you are in a position to purchase the home you want to live in.
Can you buy an investment property with a guarantor loan?
It is possible but only with a limited number of lenders. Most lenders only allow guarantor loans if you are applying for an owner-occupier home loan.
You can call us on (07) 3146 5732 or fill out our online enquiry form and we can discuss your options.
How Is a Mortgage Structured When There Is a Guarantee?
Normally, a loan is secured by the property you are purchasing. But this security – your home – can decrease in value, or the bank simply won’t be able to sell it for that much. Which means, even with your property as a security, the bank is taking on a risk. Requiring a deposit reduces that risk. So does requiring Lender’s Mortgage Insurance when the deposit isn’t large enough.
With a guarantor loan, the mortgage is structured a little differently. Both the property you are buying and the guarantor’s property are used to secure the loan.
Your guarantor doesn’t have to put the entire value of their property up as a security. Rather, they can limit the guarantee to what the bank requires, usually around 20% to 35% of the purchase price.
Can Your Guarantor Lose Their Property?
The way the mortgage is structured, the guarantor is exposed to risk. If you don’t pay back your loan, you could lose your property and your guarantor could be liable for up to the amount of their guarantee.
If the guarantee is unlimited, this could be the difference between what the bank sells your property for and the amount due on the loan. Depending on your guarantor’s financial situation – if they don’t have enough savings or couldn’t use other avenues to cover their liability – they could end up losing their home, too.
This is one reason why limiting the guarantee in the mortgage contract can be a really smart move. This helps to reduce the risk that the guarantor has to take on. For example, if you are buying a home for $400,000 and taking out a loan for $420,000 (or 105% LVR), your guarantor will have to use about $125,000 of their equity to secure your mortgage. When you use a limited guarantee, they won’t be liable for anything over this amount, no matter what happens.
Also, once you’ve paid back enough of your mortgage, you can have the guarantee removed, which means your guarantor’s assets are no longer tied to your mortgage. This will take a few years for most borrowers but at least your guarantor doesn’t have to be tied to your mortgage for the entire term of your loan.
Does the Guarantor’s Income Matter?
It depends on the loan requirements of the lender you use, your income, and the price of the property. If your income isn’t high enough – for example, if you are still a student or your income is low because you have just started working – you can use what is known as a security and income guarantee.
In this case, instead of a limited guarantee set for part of your guarantee’s property, the lender will use the guarantor’s property to secure the loan and their income to verify that the loan is affordable.
Does a Guarantor Have to Be a Parent?
With guarantor home loans, lenders do want to see that there is a close relationship between borrower and guarantor. In most cases, parents act as guarantors. In fact, some banks will only allow parental guarantees.
Some lenders, however, will allow immediate family members to act as guarantors, such as grandparents, siblings, or a spouse, although in these cases you’ll probably also have to meet stricter lending criteria.
You can contact us at any time and one of our mortgage specialists can answer any questions you have about setting up a guarantee and which lenders are more flexible with guarantee loans.
What Risks Are Involved with Guarantor Home Loans?
If you are worried that the bank would rush in and sell your parent’s home if you default on your loan, you’re like a lot of warry borrowers. But, in reality, this isn’t what happens, nor is it in the bank’s interest to do so.
The fact is, the process and costs involved in trying to sell a guarantor’s home aren’t something to shrug off and lenders realise this. Banks will try to take other avenues before having to touch any of your guarantor’s assets. If they can work with you to find a solution so you can keep paying your mortgage, everybody wins.
What If You Lose Your Job?
Don’t just stop paying your mortgage. If you’ve been made redundant but have experience in your field, your lenders know you’ll be able to get another job relatively soon.
Instead of missing mortgage payments and impacting your credit, talk to your bank about your situation. They may be able to work something out to help you better manage for a period of time, such as reducing your mortgage repayment amounts until you find another job.
What If You Can’t Make Your Mortgage Repayments with a Guarantor Loan?
If you are unable to make your home loan repayments, the bank will repossess your property before your guarantor is liable for paying any outstanding debt. Also, the bank will wait until your mortgage has been in arrears for at least 90 days, if not 180 days.
When the bank does repossess your property, if it ever gets to that point, the property will be sold to cover the loan.
- If the sale is enough to cover the remaining balance on the loan, your guarantor won’t be liable for anything.
- If the sale doesn’t cover the loan, the guarantor will be responsible for the remaining balance – up to the amount of their guarantee limit, if a limit was set.
This is why a limited guarantee can be a smart strategy. It limits the risk the guarantor ever has to take on.
For example, if the loan balance is $600,000 when you default and the bank is able to sell your property for $400,000, there will be a remaining balance of $200,000. If your mortgage contract was created with a limited guarantee of $160,000 that is all your guarantor would be liable for. The other $40,000 is the bank’s loss.
How a Guarantor Can Protect Their Property
Even in this scenario, your guarantor is not necessarily going to lose their property. They may be able to take out a personal loan or a second mortgage on their property to cover their liability.
If all of these options don’t work out, the bank will have to sell the guarantor’s property. They will then take only the balance owed. The remaining proceeds from the sale will go to the guarantor.
Can a Guarantor Change Their Mind?
If you are considering acting as a guarantor for your son or daughter, make sure you are confident in your decision before the mortgage contract is signed.
- Often, it’s less risky to use a limited guarantee to limit your liability – is the size of the guarantee something you could cope with losing if the mortgage does go into arrears?
- Banks won’t automatically repossess a property. Would your son or daughter be able to catch up with their mortgage before the 90- to 180-day period is up?
- Are there other options that you may be more comfortable with financially, such as taking out a loan to help them with the deposit?
Once the mortgage contract is signed by your child, if you refuse to enter the contract as the guarantor, it could make things difficult for your child.
When Will the Bank Remove the Guarantor?
This isn’t something that happens automatically. The borrower has to apply to have the guarantee removed. Then, the bank will decide to remove the guarantee or not.
When’s the best time to apply to have the guarantee removed?
- When the remaining loan balance is less than 80% of the property value – some lenders will let you get rid of the guarantee once the balance is less than 90% but you’ll have to pay LMI.
- If you can comfortably afford your repayments without assistance – the bank will look at your income and debt ratios to assess how well you can service the loan on your own.
- You haven’t had any missed payments for the past 6 months.
The faster your property appreciates in value, and the more you can make extra repayments on your mortgage to reduce the debt owed, the earlier you can remove the guarantee. In most cases, it takes from 2 to 5 years.
What Insurance Should I Get?
With a guarantor loan, or any other type of mortgage, some risk is part of the equation. If something happens that stops you from earning your income, even temporarily, you could have trouble keeping up with your mortgage repayments.
To help protect you and your parents in case the unexpected does happen, and for peace of mind, you may want to consider different types of insurance:
- • Income protection insurance can help if you are unable to work because of an illness or injury. An income protection policy is particularly useful if you are self-employed.
- • Total and permanent disability can help if you are no longer able to work because of a disability.
- • Life insurance will help your parents should something happen to you.
You don’t have to get insurance in order to qualify for a home loan but discussing what types of insurance might make sense for you with a financial advisor could save you and your parents a lot of financial stress down the road.
What About the Protections for Guarantors Included in the New COBP?
As of 1 July 2019, the following protections can help reduce some of the risk guarantors take on when offering the security guarantee. According to the Australian Banking Association’s new Code of Banking Practice:
- There will be a cooling off period for guarantors after they sign the agreement.
- The bank will notify your parents – or whoever is your guarantor – if you run into financial difficulty or if your circumstances change.
- The bank will attempt to receive assets from you as the borrower if you default before commencing any actions against your parents.
Lenders are also obligated to encourage guarantors to seek independent legal advice. This guideline has been in place for some time.
If you are at all concerned about how the mortgage is structured or what the details are of a mortgage contract you are going to sign, it’s prudent to seek independent legal advice yourself as well.
Can a Guarantor Have Their Own Mortgage?
What happens if your parents are still paying down their mortgage?
Having their own home loan doesn’t mean your parents can’t act as your guarantor. In fact, your parents may have multiple debt obligations like a business loan, credit cards, or a commercial property loan.
They will, however, have to have enough available equity. Then it’s possible to secure a guarantee on their property using a second mortgage.
How Much Mortgage Debt Can a Guarantor Have?
Lenders will add the current home loan amount plus the limited guarantee. This sum has to be less than 75% to 80% of the value of their property.
If it’s not, your parents won’t be able to act as your guarantor.
Can a Guarantor Sell Their Home?
Depending on where you are in paying down your home loan, they actually may not be able to sell. This can be a frustrating situation. For example, if your parents want to downsize or they want to move to a new location but they can’t because they are obligated to hold onto the equity that is used to secure your loan.
There are solutions, however:
- First, if you have paid your mortgage down to less than 90% of the value of your property, you can apply to have the guarantee removed. Don’t forget, your loan to value ratio will change both because of the amount of principal paid and because of changing property values.
- If not, you can use your own savings to make up the difference until you reach 90% LVR. The bonus of doing this – if you can afford to – is you are freeing your parents of their obligation while you also pay down a chunk of your loan early.
- Another option is to use a term deposit. Your parents can offer a term deposit for the amount of the guarantee, which the bank will then hold as a security.
Guarantor Home Loan FAQs
What’s the process for using a second mortgage as security?
Using a second mortgage for the security involves another party – your parents’ lender. They will need to give their consent because the guarantee is being secured on your parents’ property, which means two mortgages are secured to one property.
Because of this extra step, it’s a good idea not to commit to a property until you know consent has been granted, the bank valuation is completed on your parents’ property, and you have formal approval from your lender.
What if my parents are retired?
If your guarantor is already retired, you may not qualify for a no deposit loan. Australian banks tend to only accept a security guarantee from an income earner, although there are lenders who will consider self-funded retirees, pensioners, and a guarantor who is close to retirement.
Call us on (07) 3146 5732 to learn more about different lenders’ policies.
Is LMI waived for all guarantor home loans?
Lender’s Mortgage Insurance, or LMI, can end up costing thousands of dollars. It’s not something you want to get stuck paying.
This is why some borrowers will work to save up that 20% deposit so they can apply for an 80% LVR home loan and avoid paying LMI. Lenders know there’s a chance they’ll lose money if you borrow more than 80% of the value of your property and default on your loan. This is why they require LMI for a high LVR (above 80%) loan.
But, when the guarantee acts as an extra security, it makes up for the risk the bank would have had to take on so you don’t have to pay LMI.
Is it a good idea to consolidate my debt with my home loan?
Rolling your credit card debt into your mortgage can simplify your finances, making it an appealing option. However, there are a couple of things to keep in mind:
- Your debts can’t be more than 5% of the purchase price.
- You’ll need to demonstrate you’ve always made your repayments on time.
- Not all lenders will let you consolidate your credit cards and personal loans when you get a home loan.
We have plenty of experience with debt consolidation home loans and how they can be structured. Contact us today and we can talk about what your options might be.
Can I get a construction loan with no deposit?
Yes, you can get a 100% construction loan with a guarantor. However, make sure you apply for the land and construction costs up front instead of purchasing the land first and then applying for the construction loan. Also, you’ll want to save at least $5k in case your construction costs end up being more than you had anticipated.
How do low doc guarantor loans work?
If you are self-employed and don’t have the right documents to qualify for a full doc loan, a low doc loan is one way you can still buy a home. But, lenders don’t offer 100% low doc loans with a guarantor. From their perspective, it involves taking on too much risk.
How do guarantor loans differ with different lenders?
Each lender will have unique lending criteria, available loan types, and discounts. You’ll also find that different lenders have varying names for a home loan with a security guarantee, like a Family Pledge loan or Family Equity.
If you aren’t sure if a bank has a guarantee loan, you can always call the bank, or call us on (07) 3146 5732 to speak with a mortgage broker about the specifics on how guarantee loans from different lenders work.
Just how complicated are guarantee home loans?
When you are involving someone else in your mortgage contract, there are more factors and more risks. This is why it’s recommended to seek out expert advice. Not only from a mortgage broker but also from your solicitor and even a financial advisor.
You want to make sure you understand how your loan is structured, what the terms and conditions are, and any steps you may be able to take to protect your guarantor, such as getting certain types of insurance.
How Can I Get Approved for a Guarantor Loan?
You don’t have to navigate a home loan with a security guarantee on your own. Call us on (07) 3146 5732 or fill out our online enquiry form today to learn how we can help you. When you have a mortgage broker on your side who has experience with the structure of guarantee loans, you can get the clarity and insight you need to improve your chances of qualifying.