Depending on where you live, it is becoming increasingly harder to acquire your first mortgage. With the increase in property prices, more people are struggling to save for their deposit and those they can save a little, are still faced with the added expense of mortgage insurance.
So, what are the alternatives? Continue to pay rent (which is essentially dead money) in the hopes you may eventually save for the deposit – or take on more debt in the form of mortgage insurance? Thankfully, there is another alternative – you may be eligible to apply for a guarantor home loan.
HOW DOES A GUARANTOR LOAN WORK?
A guarantor home loan is when another party (commonly a parent) uses their own property as a means of security against the intended loan. This allows you (the borrower) to forego the need for a deposit; instead borrowing up to 110% of the purchase price of a home. Generally, when a person borrows more than 80 % of the property value, the bank will require you to pay mortgage insurance. This is the bank’s security if you’re unable to repay your loan.
Quite often, mortgage insurance is harder to get approved than the home loan, thus making the guarantor home loan a very attractive option. A guarantor home loan is a great way for you to enter the property market before you could on your own. After you’ve repaid some of your mortgage or your home has gained equity, you can put in an application to have the guarantee removed.
The guarantor isn’t required to make any payments on your loan. But if you can no longer keep up your repayments, the lender will turn to the guarantor to make the repayments.
THE BENEFITS OF A GUARANTOR LOAN
A recent change in lending policy has resulted in the removal of home loans without deposits from the home loan market. Guarantor home loans are now the only available option when it comes to borrowing 100% of the what it would cost to purchase the property.
There are many benefits to taking out a guarantor loan. These include:
- Getting into the property market sooner: Depending on how much equity your guarantor has in their home and the size of deposit your bank is willing to accept as genuine savings, you may only have to save a much smaller amount, meaning you can get your loan approved sooner.
- Removing the guarantor from your loan: As you continue to repay your loan and build equity in your property, you can remove the guarantee. This means that you become the only person liable for your loan.
- Avoiding LMI: By accepting a helping hand from your guarantor, you can potentially avoid having to pay Lender’s Mortgage Insurance which can save up to tens of thousands of dollars.
- You may be eligible for a lower interest rate from some mortgage providers.
Contact us today to discuss how these benefits can help you purchase your first home.
GUARANTEE LOAN INTEREST RATES AND FEES
When applying for a normal home loan or investment loan you ideally want to lock in the best interest rate with the lowest fees. However, with a guarantor home loan, the process is a little more involved. The fees and rates are obvious an important feature, but you also have to consider which loan has the best terms and conditions for the guarantor.
When it comes to interest rates, many lenders offer very competitive packages, fixed and basic loan discounts on their rates, regardless of how the loan is structured. You can expect to get a discount of between 0.8% and 1.50% off the Bank Standard Variable Rate for most loans, depending on the loan amount and lenders that you qualify with.
All lenders may charge you additional fees to arrange a guarantor home loan. The additional home loan fees you can generally expect to pay include:
- Guarantee fees: $100 – $350 for the cost involved in preparing the legal agreement between the two parties – the lender and guarantors.
- Additional valuation fee: Some lenders may charge up to $250 for the lender to organise a valuation for the guarantor’s property.
- Consent to a second mortgage: up to $500. This fee is only applicable if the guarantor already has a loan on their property and you use a different lender for your purchase. Their existing lender will need to consent to the second mortgage from your new lender and they will charge a fee to do this. This fee is rarely avoidable.
While there are extra fees associated with a guarantor loan, these are significantly less expensive when compared to Lenders Mortgage Insurance (LMI) and can save you thousands of dollars.
HOW TO QUALIFY FOR A GUARANTOR HOME LOAN
The procedure for obtaining a home loan supported by a guarantee is becoming increasingly complex and varied. Guarantor loans are great for people without a deposit but be aware that the lending criteria and guidelines are still quite stringent. This is due to the high-risk factor of lending 100% of the purchase price.
A bank will assess various facets of your situation that will determine the success of your application. These include:
- Your income and sometimes that of your guarantors.
- The age of your guarantor.
- Your credit history and that of your guarantors.
- The value of the guarantors property.
- If a first or second mortgage needs to be taken on the guarantors property.
Choosing a lender who looks favourably on your situation is key to maximising your chances of being approved for a guarantor loan. The team at Mortgage World can make your life easier by guiding in all the areas of lending policy and we can help you get approved with a reputable lender at a competitive interest rate.
ADVICE, TIPS AND CONSIDERATIONS
To give you and your guarantor added protection in the event of default, you may want to consider getting life, total and permanent disability, and/or income protection insurance. Although is not a requirement for qualifying for a guarantor loan, it can allow you to pay out your home loan if you are hit with unforeseen circumstances (such as serious injury) that prevents you from working.
A financial adviser can advise you on the right insurance product that suits your needs and financial situation.
GUARANTOR LOANS FREQUENTLY ASKED QUESTIONS
How much can I borrow with a Guarantor loan?
Currently, the only way to borrow between 100 and 110 percent of the purchase price of any property, is via a guarantor home loan. Just how much you can borrow depends your reasons for purchasing the property. First home buyers for instance, can borrow 105 percent of the property value. Other types or borrowers have different borrowing limits.
- Investors: 105 percent of the value of your investment property
- Refinancing: 100 percent of the property value
- Debt consolidation and purchase: 110 percent of the property value
- Construction: 105 percent of the total land value and cost of construction.
It is not uncommon for many people in the market to purchase a home to have considerable consumer debt in the form of personal loans and credit cards. In this situation it would be possible to consolidate debts at the same time you purchase a property, providing your total debt is under 10 percent of the purchase price.
What types of guarantors are there?
There are various types of loan guarantors, with the most common type for young first home buyers being the family/parent guarantor. This is when the guarantor is directly related to the borrower. Generally, this would be a parent but other relatives such as siblings or grandparents are reviewed on a case by case basis. Other forms of guarantees include:
- Security and servicing guarantee: This guarantor is usually a parent helping their child who has a low income, purchase their first property. The lender uses the parents’ property as extra security and will rely on the parents’ income to prove that the loan is feasible. There used to be a number of lenders that would allow a servicing guarantee but this type of guarantee can only be used when a spouse is acting as a guarantor. It is no longer available for parental guarantees.
- Security guarantee: Here the guarantor uses property that they own themselves as a means of security for your loan. If the guarantor already owes money on their property, then usually, the bank will take a second mortgage as their security. This option is mostly chosen when a first home buyer has no deposit but has a flawless credit history.
- Limited guarantee: This applies to when only a percentage of the loan will be guaranteed by the person acting as a guarantor. Guarantees can either be unlimited or limited, as it depends on what the guarantor chooses and the stipulations of the lender. Most parental guarantee are limited guarantees.
Who qualifies as a guarantor and are there any risks involved?
Generally, banks only allow parents to be guarantees of the borrower. In some circumstances, a lender may approve other direct family members, but friends and other associates would most likely be declined on the basis that the bank requires a solid and long relationship between you and the guarantor. Where someone besides a parent acts as your guarantor, you would generally need to adhere to extra lending requirements in order for you to be eligible for a guarantor home loan.
Should you default on your loan, the guarantor will be liable for the repayments. However, it is in the bank’s best interest to have you continue to pay the mortgage and so they’ll usually work with you to come up with a solution.
What if my parents are retired?
Many Australian banks will not accept a retired or elderly guarantor receiving a government pension if they are using their owner occupied home as security for your loan. However, there are some lenders who will consider these applicants, but this would be on the provider they are receive legal advice before committing to the loan agreement.
At what stage can I remove the guarantor?
Ideally, you want to be able to release the guarantor from their commitment as quickly as possible. When you have met the following conditions, you can apply to have the guarantee removed from the loan:
- Your mortgage balance is less than 80% of the value of your property. i.e. you have paid your loan down and/or your property has increased in value. In this instance you can remove your guarantor without incurring mortgage insurance.
- You can still remove the guarantee if your loan balance is 80-90% of your property’s value but you will incur mortgage insurance.
Remember, the removal will not happen unless you formally apply to have it removed. The majority of borrowers are in a situation to have the guarantee removed between two and five years after first establishing the loan.
Will my guarantors need to guarantee my entire loan?
Family guarantees are generally limited guarantees. Assuming you are borrowing 100% of the purchase price of a property this means your guarantors will generally only need to guarantee 20-30% of the amount you are borrowing.
CONTACT THE EXPERTS
At Mortgage World Australia we have the experience and expertise to quickly assess your situation and determine which lenders can approve your application. We know which loans will save you the most money and which lenders are less conservative when assessing their guarantor loans.
So, contact us today to discuss how quickly we can get you into the property market.