Limited Guarantee

Do you need the assistance of a guarantor to complete your new home purchase?

Consider a limited guarantee! You can still receive the full benefits of a guarantor loan, but with limited risk posed to the guarantor.

Read on to find out more about the features of this arrangement, to see if you are eligible to apply for this guarantee.

How much can I borrow?

With the help of a limited guarantee, you will be able to borrow 100% of the property value.

There are also many other benefits, such as no Lenders Mortgage Insurance (LMI) and no up front costs.

What is a limited guarantee?

A limited guarantee is a type of security guarantee where the guarantor’s liability is limited to only part of the home loan.

As with a normal guarantor home loan, the guarantor will have a mortgage or second mortgage on their home from the lender as additional security for the borrowers loan.

The difference is that the guarantor is not liable for the entire loan amount.

When is the limited guarantee released?

This depends on the type of limited guarantee arrangement that you have in place.

If the guarantee is limited to a certain amount, it will be released once the loan falls below a certain percentage of the property value, say 80%.

The limited guarantee is not in place for the full loan term, however it may take some time before 20% of the property is paid off by the borrower.

It is important that you get the property valued regularly to see when it reaches this level.

You will then be able to apply to the bank to have the guarantee released.

Who can offer a limited guarantee?

A variety of people may be able to help you with the assistance of a limited guarantee.

This includes, third parties such as close family, as well as extended relatives and friends.

Nearly all banks and lenders will accept a limited guarantee by a parent.

However, the parent’s must have sufficient equity in their property, before the banks will accept it as security.

However, it is important to note that each bank has a different policy regarding limited guarantees. Some banks will accept relationships that others don’t.

For this reason, It is best to speak to our mortgage brokers on 1300 399 056 or enquire online. We can quickly work out which lenders are suitable for your situation.

Benefits of a limited guarantee

There are many advantages of getting a limited guarantee, some include:

  • Borrow 100% of the purchase price!
  • The requirement of Lenders Mortgage Insurance (LMI) is waived.
  • The liability of the guarantor is restricted.
  • Both you and your parent’s will not actually have to pay anything up front.

Should I get a limited guarantee?

By limiting the guarantee the position of the guarantors is greatly improved. In the event that anything was to go wrong then they would be able to make payments on their portion of the debt to keep the lender satisfied.

Further, the guarantors borrowing capacity is not reduced as significantly, in the event that they choose to obtain a loan in their name to buy an investment property or for some other purpose.

This is because lenders will assume the guarantee will be called upon when assessing if the guarantor can afford any new loans of their own.

Get financial advice!

If you are considering applying for this type of limited guarantor loan, it is best to assess your personal financial circumstances first.

The risk posed to the guarantor may be limited, but it is still very real and may be realised if you do not have sufficient income to service the loan.

Example of a limited guarantee arrangement

If John purchased a home for $500,000 and wanted to borrow 100% of the purchase price then instead of John’s parents guaranteeing the full $500,000 loan we could arrange the loan so that they were only liable for part of it.

The first method of setting this up would be to have two separate loan accounts.

One for $400,000 (secured on John’s property) and the second for $100,000 (secured by John’s property and the guarantor’s property).

This means that the guarantor’s liability is limited to $100,000 + interest fees and charges.

The second method is for the lender to arrange a single loan account of $500,000 with a clause in the contract that outlines that they could only pursue the guarantors for a maximum of 25% of the loan amount, in this case $125,000.

In practice, the guarantor would have the same liability as the first method, except that it is structured in a different way.

How to limit the guarantee?

Guarantees are quite complicated, as there is more than one party involved in the transaction.

If you want help setting up a limited guarantee with a bank that will offer you the most competitive loan package, please speak to our team on 1300 399 056 or enquire online and one of our mortgage brokers will contact you to discuss the best way to structure your guarantor loan to limit the guarantor’s liability.