Wednesday 29 July 20
How much can I borrow?
Guarantor home loans are now the only way to borrow between 100% and 110% of the purchase price of a property.
How much you can borrow using a guarantor loan may depend on what type of borrower you are:
- First home buyers: 110% of the property value
- Construction: 105% of the total land value and cost of construction.
- Refinancing: 100% of the property value.
- Investors: 100% of the value of your investment property.
Technically, there is no maximum loan size. However, borrowing over $1,000,000 will require you to meet additional credit criteria.
Only some lenders accept second home buyers
Many lenders will not allow second home buyers to apply for a guarantor loan as they expect that they should have a strong enough asset position to buy a property on their own.
This is particularly unfair to people who have gone through a divorce or illness forcing them to sell their previous home. We know which lenders are less conservative when assessing their guarantor loans.
How do guarantor loans work?
Your guarantor will provide a guarantee for your home loan which is secured on their property. In most cases, this is your parents assisting you to buy a home.
The idea is for you to get into the property market sooner. Once you have paid off part of your loan or your property has increased in value, then you can apply to remove the guarantee.
Guarantor loans have become very popular in recent years as they cost less than standard home loans, they allow you to buy without a deposit and some lenders now allow you to limit the size of the guarantee.
What are the benefits of a guarantor loan?
Recently, no deposit home loans have been withdrawn from the market which makes guarantor loans the only way to borrow 100% or more of the purchase price.
Guarantor loans have several benefits for you as the borrower:
- You don't need a deposit, allowing you to buy a home now.
- Save money by not paying an LMI premium.
- Discounted interest rates are available from some lenders.
- You can consolidate some minor debts, such as credit cards, when you buy your home.
- You can limit the size of the guarantee.
Can I borrow more than 110%?
In the past, lenders commonly allowed people to borrow 120% with a guarantor home loan. Unfortunately these loan types are no longer available.
Do I need to prove any savings?
Even though guarantor loans allow you to borrow 100% of the purchase price, many lenders still require you to have 5% of the purchase price in genuine savings. This is simply money that you have saved yourself although there are exceptions such as using paid rent as genuine savings.
Other lenders do not have a specific policy regarding this. Instead their credit scoring system will decline your loan based on your asset position relative to your income.
Banks view people who have a high income and a low asset position to be a high risk. Many young people have spent their money on their education, a car, a wedding or travelling and only begin saving for a house later in life. These people are not high-risk borrowers, they just have different priorities!
Talk to us to find out which lenders do not require genuine savings.
Can I buy an investment property?
Only two or three lenders in Australia will accept no deposit investment loans supported by a guarantor.
We can assist you to buy one investment property however buying multiple investment properties is not normally accepted. This is because the guarantor is taking an unnecessarily high risk whereas the borrower is making all of the potential profit.
If the guarantor is in a strong financial position, then multiple investment properties may be considered.
How is the mortgage for the guarantee structured?
The loan is secured by both the property that you are buying and the property owned by the guarantor.
It is quite simple, and if you use a limited guarantee then the guarantor can reduce their exposure to your mortgage.
The structure is very similar if your parents already have a home loan on their property. The guarantee for your loan is secured using a second mortgage behind their current loan.
How much is the guarantee limited to?
For the majority of guarantor loans we ask the lender to limit the guarantee secured on the guarantor's property. This means they are not liable for the entire amount of the loan, only a portion of it. The size of the limited guarantee is calculated as follows:
Size of the limited guarantee = (Loan Amount – (0.8 * Purchase Price))/0.75.
For example if you are buying a property for $500,000 and are borrowing $525,000 to cover your expenses such as stamp duty then the calculation would be:
($525,000 loan amount – (0.8 * $500,000 purchase price))/0.75
$125,000/0.75 = A limited guarantee of $166,700 (rounded to the nearest $100)
Who can be a guarantor?
Most banks will only allow parental guarantees, that is, a guarantee from the borrower's parents.
Lenders generally won't consider guarantees from immediate family members such as siblings, grandparents, spouses, de facto partners or adult children. Friends, workmates or associates are not normally accepted because the banks want to make sure that the guarantor has a very strong relationship with you.
If someone other than your parents is your guarantor, then you may need to meet additional lending criteria in order to qualify for a home loan, and is not acceptable in most cases.
What are the risks of being a guarantor?
On paper, the guarantor is ultimately liable for your home loan should you default.
There is a big fear that banks move quickly to sell the guarantor's home to cover the remaining debt but the reality is that banks try everything to solve the problem before taking this drastic decision.
The reason is that there is often a significant process and cost involved in trying to sell the guarantor's home.
The bank knows that it will struggle to break even by going down this path so they would much rather that you keep paying your mortgage.
To do this, they will want to work out why you're having trouble managing your repayments and whether a solution can be found.
You've lost your job
Let's say that you've recently been made redundant from your job as a maths teacher.
Lenders take the view that you have a good chance of getting another job soon.
In the meantime, the bank may reduce your mortgage repayments for a period of time until you're able to find work again.
Your property will be sold first
Should you still not be able to make your home loan repayments, lenders will always take action on your property first before making the guarantor liable to pay out the outstanding debt.
Of course, it's important to bear in mind that repossession will only commence if the mortgage has been in arrears for 90-180 days.
Don't forget the limited guarantee
What if the sale of your child's property isn't enough to cover the home loan?
Remember, if you have a limited guarantee in place you are only liable for up to the agreed amount.
This is usually around 20-35% of the purchase price plus the costs of stampy duty, conveyancing fees and other associated home loan costs.
For example, if the outstanding debt is for $700,000 but the limited guarantee is for only $210,000, the guarantors are only liable to cover the outstanding mortgage up to $210,000.
Obviously, if the property sold for $700,000 or more, they wouldn't have to worry about anything.
However, if the property only sells for $440,000, the guarantor will have to cover up to $210,000 with equity in their property to cover the shortfall but they won't be liable for the remaining $50,000.
Of course, if the property sells for $590,000, then the guarantor would be liable for $110,000.
At any rate, you should be aware of the size of the guarantee that you're providing.
You have more options!
If the guarantors don't have the equity or savings to cover the outstanding amount, they can apply for:
- A second mortgage on their property.
- A personal loan.
If all these avenues have been exhausted, banks will sell the guarantor's property but will only take enough of the proceeds to cover the home loan up to the limited guarantee.
The rest of the sales proceeds will go to the guarantors.
Should I act as a guarantor?
You should never feel pressured to enter a guarantor loan.
Choosing to act as a guarantor is a big decision so it's recommended that you seek independent financial advice. Ask yourself the following questions:
- How big is the limited guarantee that you're committing to? Are you able to cover any outstanding costs should things go pear-shaped?
- Under what condition will you be liable to pay? Generally, banks will only look to take action if the mortgage is in arrears for 90-180 days.
- What is the character of the person that you're guaranteeing? This may be difficult to answer if it's your own son or daughter, but you should be honest in answering this question.
If your child is struggling to save a deposit but you want to avoid some of the risks of acting as your guarantor, a parent assist home loan may be better suited to your situation.
What if I change my mind about being a guarantor?
That's ok just but try and make this decision before your son or daughter receive home loan approval and sign the Contract of Sale.
The reason is that the borrower may default on the contract and be sued.
When can I remove the guarantee?
Ultimately, you do not want the guarantee to be in place for the entire term of the 30-year loan. You should apply to the bank to remove the guarantee when the following conditions have been met:
- You can afford the repayments without any assistance.
- Your loan is for less than 90% of the property value (ideally 80% or less).
- You haven't missed any payments in the last 6 months.
To be clear, you must apply with the bank to remove the guarantee – it is not automatic!
Most people can remove the guarantee somewhere between 2 and 5 years after they initially set up the loan, although this can vary significantly.
Many guarantees are set up because the borrower has no deposit so removing the guarantee most often depends on how much the property appreciates in value and how much in extra repayments the borrower can afford to make.
You can still remove the guarantee if you owe more than 80% of the property value but you may have to pay LMI to achieve this.
Should I get insurance?
To give you and your parents added protection in the event of default, you may want to consider getting life, total and permanent disability, and/or income protection insurance.
It's not a requirement for qualifying for a guarantor loan but it can allow you to pay out your home loan if you are hit with an unfortunate event that stops you from working.
It's best you seek advice from a financial adviser to ensure that you choose an insurance product that suits your needs and financial situation.
Are there other protections for guarantors?
From 1 July 2019, the Australian Banking Association will enforce a new Code of Banking Practice (COBP). As part of these new guidelines:
- Guarantors will have cooling-off period after signing the guarantor agreement.
- Guarantors will be encouraged to seek independent legal advice before signing, as is currently the case.
- If you, as the guaranteed borrower, get into financial difficulty, or your circumstances change, your guarantor (parents) will be notified by the bank.
- The bank will first attempt to receive assets from you as the borrower before starting action against your parents to repay the home loan. If this is a concern to you, we recommend that you seek independent legal advice.
What if my parents already have a home loan?
That's okay. As long as they have sufficient equity, some of our lenders can still secure a guarantee on their property using a second mortgage.
To be clear, you guarantor should declare all loans secured on their property including business or commercial property loans, otherwise the approval may be withdrawn before settlement.
How do lenders work out if your guarantor has enough equity in their property?
The total debt secured on the guarantors property, for example their current home loan plus the new limited guarantee, must be less than 75% – 80% of the value of their property.
For example, if your guarantor had a home loan with $100,000 owing and they needed to give a limited guarantee of $100,000 then the total debt secured on their property would be $200,000. Their home must be worth $267,000 or more for the guarantor loan to be approved.
Don't worry if this seems complicated! You can use our guarantor loan calculator to work it out.
Can you sell your house if you are a guarantor?
Let's say that after 3 or 4 years acting as your guarantor, your Mum and Dad decide they want to pull up stumps and sell their home.
It could be that they want to downsize or live their retirement dream of travelling the world. What do you do then?
Chances are you wouldn't have paid down your mortgage to no more than 90% of the property value (the minimum LVR at which you'll be able to remove the guarantee with most lenders).
So before they sign up to the guarantor arrangement, they should be aware that they may be unable to sell the property or borrow on their mortgage (top-up).
Before you tell your parents to hold off on whatever financial goals or dreams they had, you have some options available.
If you owe more than 90% LVR, are you able to come up with your own savings to cover the difference?
The other option is that once your Mum and Dad sell, ask them if they can secure the guarantee with a dollar for dollar term deposit.
For example, if the guarantee was $90,000, then they will need to provide the lender with a $90,000 term deposit which will be held as security.
What if my parents are retired?
Most Australian banks will not accept a security guarantee from a retired or elderly guarantor if they don't have enough liquid assets to cover the guaranteed amount.
Many lenders can accept guarantees from people close to retirement, pensioners and self-funded retirees over 65 years of age as long as they obtain legal advice prior to signing the loan offer.
Why is there no LMI premium?
From the bank's point of view, if you are borrowing more than 80% of the value of your property then there is a chance that they will lose money if you can't make your repayments. Because of this they charge you a fee known as Lenders Mortgage Insurance (LMI) to protect themselves in case there is a loss.
This fee can be quite significant, costing more than $10,000.
However, with a guarantee as additional security the bank considers your family pledge loan to be under 80% of the value of your property combined with the value of the guarantee. As a result of this they waive the requirement for LMI.
Why is a second mortgage such a big problem?
If your parents already have a home loan secured on their property, then the guarantee will need to be secured by a second mortgage.
This isn't a problem in most cases, however, it can be an issue if your application isn't submitted to the bank correctly.
Do not commit to a property until:
- Consent for the second mortgage has been granted.
- A bank valuation has been completed on your guarantor's property.
- Your lender has issued a formal approval.
The lender that already has a home loan secured on your parents' property needs to give consent to the guarantee being secured on the property. There is a small risk that they will deny or withhold the consent which can leave you high and dry.
The method of calculating the equity in your parents' property can be very complex if they already have a loan. Please use our guarantor loan calculator or call us on (02) 4905 0250 for more information.
My bank won't let me consolidate debt
Very few lenders will allow you to buy a home and consolidate your credit cards or personal loans at the same time. We know which lenders will allow you to roll everything into one simple, low repayment each month.
Note that you can only consolidate a few minor debts, and if your debts are over 5% of the purchase price then you will not be able to roll them into the mortgage with any lender. Your repayments must be on time, every time, before a lender will allow you to combine them into your new mortgage.
What if I get divorced?
The less obvious risk of going into a guarantor loan arrangement is you splitting up with your partner and the partner choosing not make mortgage repayments.
This not only puts you at risk of default but can also potentially put your parents in a precarious position.
Playing with the mortgage in this way is quite common when couples get divorced. In fact, they're often advised by their solicitor to do so!
We're experts at buying out ex partners and we can start the conversation with your bank as to how this will work with your parents providing a gurantee.
What are the names used for guarantor loans?
Every lender seems to have come up with their own name for guarantor loans! St George Bank uses the term ‘Family Pledge', CBA uses the term ‘Family Support' or ‘Family Equity', Rams uses the term ‘Fast Track' whereas ANZ and Westpac use the term ‘Family Guarantee'. Don't worry, they all mean essentially the same thing. Most of these terms refer to a security guarantee, as only a few select lenders allow other types of guarantees.
There are big differences between the bank's credit guidelines, loan types and discounts for family guarantee loans.
Can I get a 100% construction loan?
Almost, it is possible to borrow 95% of the land and construction value if you have a guarantor, however, you will still have to prove 5% genuine savings and enough cash to cover fees and building/land deposits.
Why do I need an expert?
Guaranteeing somebody else's loan is a major commitment so you should always seek advice from the appropriate professionals such as your solicitor before deciding to proceed.
We recommend that you have a preliminary discussion with your solicitor before you apply for the loan and then take the ‘Guarantee & Indemnity' documents to your solicitor for legal advice prior to signing them.
It also helps to seek out a specialist mortgage broker like Grace Loans because there are many aspects to consider when applying for this type of mortgage:
- Getting approval: Lenders are more conservative than ever, but they are particularly conservative with guarantor loans. We know which lenders accept which types of guarantees and which lenders will accept someone in your situation.
- Know the terms and conditions: Some banks have simple terms and conditions for their guarantor loans and allow you to limit the amount of the guarantee. However many lenders will not limit the guarantee which means the guarantor could be in a much worse position if you cannot make your repayments.
- The exit strategy: The loan may have a term of 30 years, however you don't need to keep the guarantee in place for that long. We can help you work out a strategy of either making extra repayments, or refinancing to remove the guarantee in as little as 2 to 5 years.
- Protecting the guarantor: If you cannot pay your loan then how can you protect your guarantor from having to pay your loan and possibly losing their home? Did you know that you can reduce the risk to the guarantor by obtaining insurance?
If you don't set up your mortgage in the right way then you may be putting your parents at a higher risk, or you may not be able to remove the guarantee as quickly as you would like.
Bethany Massey is a authorised credit representative of BLSSA Pty Ltd
ACN 117651760 Australian Credit Licence 391237
Phone: (02) 4905 0250 | Mobile: 0466 106 888