For some young individuals, saving for a home loan deposit to purchase their first home is an almost impossible dream. By acting as a guarantor, you may be able to help your kids get into their first home sooner so you can finally enjoy the whole house to yourself.
What’s does it mean to be a guarantor?
As the guarantor, you use the equity in your property as part security. The lender takes a mortgage over both your property and the property purchased by the kids. Usually, there will be two loans, both in the names of the kids, but you would only guarantor the loan that forms the basis of the required deposit.
The banks assess the home loan application based on the borrowers’ financial information, and they will be responsible for the repayments on both loans. In the event that your kids cannot make repayments, you may be asked to cover any amount outstanding on the loan you have guaranteed after the property has been reclaimed by the bank.
What are the benefits of guaranteeing a loan?
Your kids can benefit in several ways when you act as guarantor:
- Getting into the property market sooner
- Avoid the cost of lender’s mortgage insurance (LMI)
- Access to loans with more favourable interest rates and features
Who can be a guarantor?
In most cases, a guarantor is limited to immediate family such as parents, siblings or grandparents. Lenders will also consider the guarantor’s age, assets and employment details.
Sally wants to buy a $300,000 home, but does not have any deposit. Her parents will act as guarantors so that she can buy her home quicker without waiting to save a deposit. The below table shows how you might work out how much the guarantor is guaranteeing:
Loan 1 – in the name of Sally
Loan 2 – in the name of Sally & guaranteed by Sally’s parents*
Secured by: Sally’s new property
Secured by: Sally’s new home as well as Sally’s parents’ property
Loan amount: $240,000
(80% of the property value)
Loan amount: $60,000
(Sally’s parents are securing the difference of $60,000 which is 20% of Sally’s property value).
* Please note: this case study is for illustrative purposes only. It does not include fees and charges that may be payable, including stamp duty and transfer fees.
- To release a guarantee, the guarantors need to apply to the lender, and as a general rule, the lender would require a minimum of 5% equity in the property (at the lender’s discretion)
- If you choose to release the guarantee where total borrowings are more than 80% of the current value of the property, then the borrowers will have to pay LMI
- The lender will take a mortgage over the security guarantor’s property
- You may be liable for the debt you have guaranteed if the borrowers do not meet their obligations under the guaranteed loan
- You should talk to your Credit Representative if you are thinking of selling your property while the guarantee is in place
- Security guarantees ordinarily require independent legal and financial advice
We recommend the guarantor seek professional advice based on their individual circumstances before entering into a security guarantee. Consult one of Launch’s award-winning mortgage brokers to discuss whether providing a guarantee on a loan is right for you.
Launch Finance is based in Western Australia and services clients nationally. Our offices are located in Perth and Mandurah, contact us on (08) 9367 4222 or [email protected] and we will put you in touch with one of our expert brokers in your area. If you are a current Launch client, we recommend you call your broker directly on their mobile, the most up to date details for our team can be found here.