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The low down on Guarantors

Keen to get your foot in the door but don’t have a 20% deposit? Having a guarantor could help.

Guarantors are generally immediate family members who help to secure additional funds by using their own home’s equity or another property they might own to provide security for a portion of your loan amount (the Guarantee).

The guarantee can be limited to a specified amount providing peace of mind. It also allows the guarantor’s property to be released when this specified amount has been repaid.

The guaranteed amount reduces the Loan to Value Ratio (LVR) and the amount of Lenders Mortgage Insurance (LMI) you would need to pay. Depending upon the amount guaranteed, you might be able to avoid LMI altogether.

LMI is a type of insurance that covers lenders if the borrower defaults on a loan. Generally, a 20% deposit is required to avoid paying LMI.

There are some important things to note when considering a Guarantor Loan:

  • You must be able to service the entire loan (i.e. make the full repayments).
  • The guarantor must seek and receive independent financial and legal advice regarding their obligation as a guarantor.
  • The guarantor is liable for the limited amount as specified in the loan contract should the borrower breach loan conditions.
  • Once the borrower has paid off the loan to the standard Loan to Value Ratio requirement (less than or equal to 80%), then both the borrower and the guarantor can apply to release the guarantee.
  • You can request a review of your loan at any time along with the release of the guarantor security property. You might do this when you have finished significant improvements to your home which has increased its value or market conditions might have improved to a point where your guarantor security property is no longer required.
  • The exact amount of security will depend upon a range of factors. That's why it is best to talk to an expert who can take you through a scenario, based on your individual circumstances.

Looking for more tips on 'Getting your foot in the door!'? Check out our blog post here.

Applying for a home loan can be confusing at the best of times. At Bank of us we have a team of home loan specialists who are more than happy to chat with you about your individual circumstances.

Example:

Jane has saved a deposit of $15,000 and is keen to buy a $300,000 property. Based on this, the Loan to Value Ratio is 95% and as a result Jane would need to pay Lenders Mortgage Insurance. Jane’s parents agree to offer a guarantee as additional security using their home’s equity, reducing the LVR to 80% and avoiding the LMI.