What Is A Guarantor Loan?

A Guarantor Loan is like a normal home loan except that somebody has agreed to offer a guarantee to the lender that the loan will be repaid.

First home buyers with little or no deposit often need their parents or family member to guarantee their application in order to ensure approval, otherwise their borrowing capacity may be severely restricted.

The guarantors obligation

The guarantor is liable in the event that the mortgage cannot be repaid.

This means that in the event that the borrower defaults, the lender will generally sell the borrowers property and the guarantor will be liable to pay the remaining amount.

The property is additionally secured by the guarantors home. Therefore the bank may also use this to recover their funds.

Why do people use Guarantor Loans?

Over 60% of first home buyers get some type of help from their parents when buying a property.

This is generally in the form of a gifted deposit or guarantee on their home loan.

There are various reasons why borrowers looking for a loan would choose to use a guarantor. Usually it comes down to their lack of finances and the many advantages of this loan type:

  • You can borrow 100% or more of the purchase price.
  • You do not need to have saved a deposit.
  • You will pay no Lenders Mortgage Insurance (LMI), savings yourself thousands of dollars!
  • You can get the same professional package and basic loan discounts.
  • Lenders are less conservative and so you are more likely to get approval.

With so many advantages, it can be an incredibly attractive financing option for those with no savings.

What is the guarantee amount?

The amount of the guarantee can usually be limited to around 25% of the total loan amount.

This then gives banks the comfort to lend 100% of the purchase price as they have sufficient security to cover the loan.

Thinking of limiting the amount of your guarantee? Please enquire online or call us on 1300 399 056 to speak to our expert mortgage brokers who can assist you with setting up a limited guarantee loan.

What security is required?

Although there are several types of guarantees, the most common is for the lender to take security over some real estate owned by the guarantor. This is called a security guarantee.

With this type of guarantee, the banks will take a mortgage over the guarantors property. This can be a second mortgage, if the guarantor already has a loan on their property.

How does a bank arrange a second mortgage?

If your guarantor already has a loan on their property then the lender will need to take a second mortgage behind the existing loan.

Once the loan is approved, most banks will generally send you some additional paperwork to complete.

What does the guarantor have to do?

The guarantor will sign a consent letter and a deed of priority.

The new lender will then send these documents to the guarantor’s existing lender, requesting them to allow a 2nd mortgage to be taken behind the first loan.

Once consent is given, the new lender will liaise with the existing lender to arrange the 2nd mortgage.

Generally, they will charge a consent fee of around $250. This can be paid by cheque and sent along with the consent letter.

Sound complicated? Don’t worry! It is simpler then it looks and we work with the lenders to make sure it’s all taken care of.

Please contact us on 1300 399 056 or enquire online to speak to a mortgage broker who knows how to get your guarantor loan approved!

Reducing the guarantors risk

Becoming a guarantor is a big commitment and must be carefully thought through.

We are strong believers in financing the purchase of a home through a guarantor loan. However, we are aware that the risk for the guarantor has to be reduced as much as possible.

It is important that guarantors speak to the lender, request a copy of all loan documentation and get independent legal advice about the guarantee that they are undertaking.

Guarantors must be aware of their obligations and duties under the guarantee, as well as how and when the guarantee can be exercised by the bank.

This will protect the guarantor from the risk of the arrangement.

Removing the Guarantee

Most people are commonly under the misconception that the guarantee has to be in place for the full 30 years of the loan. However, this is not always the case.

The guarantee is generally removed approximately five years after the loan is first advanced.

By this stage, the borrower will have reduced their loan amount to 90% of the property value, lowering the risk to the lender.

If you had made consistent mortgage repayments and have paid off at least 10% of your loan, you should think about removing the guarantee.

Speak to an expert

We are specialist mortgage brokers that deal with guarantor lending on a day to day basis.

Please enquire online to contact us on 1300 399 056 to speak to one of our staff who can assist you further and help you apply for a guarantor mortgage.