Saving a deposit for your first home is hard work – and it takes time. If your parents or another close relative are happy to help you, then having a family guarantee can be an option to get you into the property market sooner. This option may suit if you have the ability to make the required home loan repayments but don’t have enough deposit.
A guarantor is a person who agrees to provide additional security for your home loan. No cash changes hands, the guarantor supports your loan by providing the lender with the security for your loan, usually a property they own, although a guarantee can also be offered against a term deposit.
Generally, lenders require your guarantor to be a close family member (parent, grand parent, or sibling).
For the Borrower: How will a guarantor help your application
By having a guarantor, you may be able to borrow up to the full purchase price and sometimes even the costs associated with purchasing property. This may be useful for example, if the property you’re buying needs some renovations that you could then use your savings for.
The limit a lender will go up to varies from lender to lender – some may still insist that you contribute some of your own equity towards the purchase, even if you have a guarantor.
A significant benefit of having a guarantor is that you may save thousands of dollars by avoiding Lenders Mortgage Insurance (LMI). Generally, LMI is required for home loans where you have less than 20% deposit. (see our Guide to Lender’s mortgage insurance). Having a family guarantee in place also allows you to avoid the higher interest rates charged on loans above 80% of the purchase price of a property.
Most lenders will also have requirements around how much equity the guarantor must be left with in their own property after providing the guarantee.
Releasing the guarantee
After you’ve built up equity in your property, and the total of all your lending is below 80% of the value of your home alone, you can ask the bank to release your guarantor.
The timeframe to achieve this will vary depending on several factors:
- your original contribution
- whether your property has appreciated in value over time.
- extra repayments you make, and
Depending on the lender, you may be required to pay additional fees to release your guarantor, which can include a fee for the lender to revalue the primary security property as well as their discharge fees.
If your guarantor’s circumstances change and they need to have the guarantee released before the loan is down to 80%, you may still have the option of refinancing and paying lenders mortgage insurance, which, if enough time has passed and your home has gone up in value, may be much lower than it would have been at the time of the purchase.
For the Guarantor: What are the risks if you choose to provide a guarantee?
Becoming a guarantor is a significant decision and there are several important points you should consider If you choose to provide a guarantee.
Some of the ways your financial situation may be impacted are set out below for you:
- You’ll be signing a legal contract in which you agree to repay the balance of the guaranteed home loan should the borrower become unable to meet the repayment terms and conditions of their loan contract.
- If this happens, lenders will first seek to recover the debt from the borrower, usually by stepping in to assist with the sale of the borrowers’ security before they seek any security you have provided in support of your guarantee.
- The amount shown in the guarantee could be the entire amount of the borrower’s loan, or preferably, an amount limited to the excess above 80% of the property being purchased. This is important to understand as you may be required to pay the lender the maximum amount shown in the guarantee, along with interest and reasonable enforcement expenses. We can guide you to lenders who will limit the guarantee amount to help minimise risk to the guarantors.
- If at a later stage, the lender lends more money to the borrower, your guarantee will cover the additional borrowing too. That said, the maximum amount of your liability won’t increase unless you agree to this in writing.
- If you don’t pay in the shortfall, the lender may enforce their legal rights, which could involve selling any security you have offered under your guarantee.
- Allowing your property to be used for a guarantee will often result in any redraw in the guarantors loans being cancelled, or frozen, so there are some important conversations to have prior to setting up a family guarantee loan structure.
Agreeing to be a guarantor and providing a guarantee does involve a financial risk, which in the worst case scenario, could result in you losing the property you have put up as security.
Depending on the severity of the default and your ability to repay any amount required under the guarantee, your credit report may also be negatively impacted.
We work to make sure that any prospective guarantor is completely comfortable with the borrowers position and is fully informed about the strength of the borrowers position as well as the process before committing to stand guarantee.
For the Guarantor: Other useful information when providing a guarantee?
When security support is provided for a home loan application, some lenders will assess the application based on the borrowers’ financial information, others will require you to prove that you can afford to repay the guaranteed loan amount yourself.
You can withdraw from the guarantee through a written request in the following scenarios:
- Before the lender provides any money to the borrower(s) under the loan contract; or
- If (after any money is first provided) the final loan contract is materially different from the one the lender gave you before you signed the guarantee.
You can be released from the guarantee when your guarantee is no longer required by the lender. This typically occurs when the guaranteed amount has been paid off by the borrower(s) and the loan is reduced, or if the borrower’s property has risen in value sufficiently that the guarantee is no longer required.
Alternatively, you can typically end your financial obligation under the guarantee at any time by:
- Paying the lender any money the borrower(s) owes at the time, including any further amounts they’re obliged to provide which are covered by your guarantee.
- Paying the maximum amount required under the guarantee; or
- Suggesting another arrangement that the lender agrees to.