Ultimate Guide to Loan Guarantor and the Family Guarantee

If you're struggling to save a 20% deposit for a home loan, a Guarantor through the Family Guarantee could be your solution. This approach allows a family member to help you secure a home loan, potentially saving on costs and enabling you to enter the property market sooner. This guide will walk you through everything you need to know about guarantor loans, the Family Security Guarantee, and the roles of both borrowers and guarantors.

Navigating the Article

What Is a Guarantor?

A guarantor backs a borrower's home loan, ensuring repayments if the borrower defaults, enabling better loan terms and avoiding extra costs like LMI.

This person, often a parent or close family member, acts as a safety net for the lender. When a guarantor mortgage is involved, the guarantor must have the financial capacity to cover potential repayments. The primary advantage for the borrower is the potential to secure a larger home loan or avoid certain costs, thanks to the added security provided by the guarantor.

Return to top

What Is a Family Guarantee?

The Family Guarantee allows an immediate family member, such as parents, siblings, or even adult children, to act as your home loan guarantor. By securing a portion of your loan, the guarantor can help lower your loan-to-value ratio (LVR) to below 80%, which means you can avoid paying Lenders Mortgage Insurance (LMI). This can be a significant cost saving. Your guarantor can use either cash (like savings or a term deposit) or equity from their home as security, without needing to hand over any funds directly to you.

Return to top

How a These Can Reduce Borrowing Costs

Imagine you're looking to borrow $270,000 for a property valued at $300,000. Without a guarantor, your LVR would be calculated as: Loan Amount ÷ Property Value = LVR $270,000 ÷ $300,000 x 100 = 90%

With an LVR of 90%, you would typically need to pay LMI. However, if a family member agrees to provide $40,000 as additional security under a family guarantee mortgage, your LVR could be reduced: Loan Amount ÷ (Property value + Family Security Guarantee amount) = LVR $270,000 ÷ ($300,000 + $40,000) x 100 = 79%

With an LVR of 79%, LMI is no longer required, leading to potential savings.

Return to top

Important Information for the Loan Guarantor

Types of Security for the Home Loan Guarantor

As a house loan guarantor, you have options when it comes to securing the guaranteed sum. You can use your home’s equity or a cash sum. If you opt for cash, it can be placed in a term deposit to act as a guarantee, helping your family member secure a home loan more easily.

Term Deposits for Your Family Loan Guarantee

If you choose to secure the loan with cash, a term deposit can be used to secure the funds and allow the guarantor to earn interest. The interest rate on this deposit will typically be the standard advertised rate, with interest paid either monthly or annually. The term deposit will continue to roll over until the required LVR is achieved and the guarantee can be released. Be sure to check if the bank has any limitations on the amount of cash that can earn interest. It's crucial to seek independent legal advice before agreeing to be a parent guarantor or acting as a guarantor in any capacity.

Understanding the Risks of Being a Home Loan Guarantor

Becoming a guarantor for a mortgage loan is a significant commitment. Here are key points to consider:

• Ensure you're confident about both your financial situation and the borrower’s ability to repay the loan.
• Remember, a single guarantee can represent no more than 50% of your total security.
• As the guarantor, you are liable for the amount you guarantee. If the borrower defaults, you may need to pay the guaranteed amount, which could involve using your term deposit or even selling your property.
• Acting as a guarantor may also impact your own ability to borrow money in the future. Make sure you fully understand the terms of the guarantee agreement and seek mandatory legal and financial advice before proceeding.

Return to top

Information for the Loan Borrower

Advantages of Having a Home Loan Guarantor

With a home loan guarantor, you can benefit in several ways:

• More borrowing power: You can maximize the amount you borrow, potentially covering up to 100% of the purchase price plus additional costs like stamp duty.
• Cost savings: Avoiding LMI through a family guarantee mortgage can save you a significant amount of money.
• Greater flexibility: With added security, you may be able to enter the property market sooner and choose a property that suits your needs.

Eligibility for the Family Guarantee

To qualify for the Family Guarantee, you must be purchasing or refinancing a home for yourself or as an investment property. For investment properties, the borrower must not own any other properties at the time of application. For owner-occupied properties, a maximum of one other property may be owned, provided it doesn't have sufficient equity to serve as security.

Choosing the Right Home Loan and Interest Rates

The Family Guarantee can be applied to a variety of home loans, but it's important to select a loan that meets your needs. Consider factors like home loan interest rates, loan features, and your long-term financial goals. Keep in mind that this guarantee cannot be used with line of credit loans, bridging loans, or for debt consolidation purposes.

Frequently Asked Questions

Who can be a guarantor for a Family Security Guarantee?

Your parents, legal guardian, siblings, or adult children can act as your parent guarantor or family guarantor for a mortgage loan.

How is a family guarantee mortgage released?

The guarantee can be released if the borrower’s LVR reduces to a point where LMI is no longer required, or if the borrower is willing to pay the LMI premium.

When might the bank take action against a loan guarantor?

This would only occur if the borrower defaults on the loan and all other options have been exhausted.

How does the bank determine the amount of the guarantee?

The guarantee amount depends on factors like the loan amount, property value, the guarantor's equity, and the maximum guarantee limit.

Can a guarantor limit their financial responsibility?

Yes, guarantors can choose the amount they want to guarantee, up to 50% of the loan value.

Does being a guarantor affect the ability to take out a loan?

Yes, acting as a guarantor can reduce your own borrowing capacity.

Return to top

Conclusion

Using a guarantor under the Family Security Guarantee can make homeownership more accessible by reducing your borrowing costs and increasing your loan options. Whether you're a potential borrower or considering acting as a guarantor, understanding the benefits and risks involved is crucial. Ensure you consult with a financial advisor and seek independent legal advice before making any commitments.

For more information on home loan rates, mortgage interest rates, and finding the best home loans for your needs, speak with one of our lenders today.

Disclaimer: Unless otherwise specified, the opinions expressed in this article are strictly for general informational and entertainment purposes only and should not be taken as financial advice or recommendation. Views are subject to change without notice at any time.