Home Loan Rate – Australia

If a person is trying to obtain a home loan and he or she does not meet the requirements, a lender may ask the person to supply a guarantor. The lender asks for this because they do not feel comfortable with the borrower’s ability to make repayments. This situation usually occurs when an applicant has no deposit, bad credit, or little proof of income. Young people and people with low incomes are the borrowers most commonly in need of a guarantor loan.

A guarantor loan is a loan in which the borrowers do not qualify for the loan amount and must gain additional support from a third party. The third party, or guarantor, can be a family member, or in some cases even a friend. The guarantor will either provide additional security or collateral for the loan, or he or she may even help make the payments for the loan.

Having a guarantor, whether it is a friend or a family member, can allow you to get a loan for the full price of the home you intend to purchase. In some cases, you may even be able to get a loan of up to 110% to cover additional costs you may incur, such as stamp duty. Sometimes, this money can even be used to consolidate personal debt.

A guarantor loan is sometimes referred to as a family guarantee loan, family pledge loan, or fast track loan, depending on the lender.

There are two distinct kinds of guarantee agreements. A guarantor loan can either be a servicing guarantee or a security guarantee. The most common type of guarantor loan is the security guarantee. In this type of guarantor loan, the third party’s assets are used as additional security for the loan. If the borrower doesn’t have enough money for a sufficient deposit on the property, or if the borrower doesn’t want to pay mortgage insurance, this type of guarantee will be used. In this case, the lender will allow the guarantor to only guarantee around 20% of the loan instead of the entire amount. This is called a limited guarantee.

Servicing guarantees are typically utilized when the guarantor agrees to help the borrower to make regular repayments on the loan. This type of guarantor loan is very rare and isn’t offered by many lenders. At the beginning of 2011, new nationwide lending laws were put into effect, and, as a result, it is likely that this type of agreement won’t be available for much longer. The new laws require all brokers and lenders to verify that borrowers can handle the proposed debt on their own without hardship, which would not allow service guarantees.

Below are three different guarantor loan examples:

Example 1: Security guarantee.

A couple wishes to buy their first home for the price of $500,000. They are able to afford the loan, but they don’t have the deposit amount of 5% which is required by the bank. A family member acts as a guarantor for the couple by using an owned home, worth $1,000,000, for security on the loan amount of $525,000 (purchase amount plus fees). This gives a loan to value ratio of 35%.

Example 2: Limited guarantee

A couple wishes to buy a home costing $500,000, which they can afford to service. However, they do not have the required deposit amount of 5% required by the lender. A family member agrees to act as guarantor, but only for a percentage of the loan. The guarantor guarantees 20% of the required loan amount of $525,000 (purchase price plus fees) which comes to be $156,250. This gives a loan to value ratio of 80%.

Example 3: Servicing and security guarantee

A couple wishes to buy a home for $500,000, but they cannot afford to service the loan, nor do they have the lender’s required deposit amount of 5%. A family member agrees to act as guarantor for the couple by providing them both with repayment help and security for the loan. The guarantor owns a home worth $1,000,000. This gives a loan to value ratio of 35%.

If you are thinking of becoming a guarantor, it is not a decision to take lightly. If the primary borrower defaults on the loan, you as guarantor will take full liability for the debt. You need to be sure that the person for whom you are acting as guarantor is able to pay back the debt, otherwise you will become responsible for it.

This decision should be thought through very carefully. You should consult your family, as well as a mortgage broker or other financial advisor. As long as the borrower doesn’t default on the loan, agreeing to act as a guarantor can be an excellent way to help someone you love.

If you choose to use a guarantor when you apply for a mortgage, the loan will still be in your name. As such, you will still be able to apply for any applicable government grants including the First Home Buyer Grant.

Get more information on guarantor mortgages.

If your financial history does not allow you to receive approval for a home loan on your own, you might have more luck if you take advantage of the power of family pledge mortgages. This is when a family member agrees to offer support for your loan by putting up equity in their own property or providing income assistance. This can also be beneficial for people who want to apply for a loan on a home that is too expensive for them to apply for under normal circumstances.

Reasons Why You Might Want to Apply

• If you have children who are buying a home, they may be limited in the size of a loan that they can apply for. This could be because of their income, or it might be because of the size of their deposit. Relatively small deposits also mean higher interest rates and lender’s insurance.
• You may want to help your children buy a property now, rather than forcing them to wait until they can save up a large enough deposit.
• You may have children who don’t have enough money to buy an expensive home now, but they are in a field where it makes sense to think that their income will continue to grow.

Equity Support

Equity support is the most popular form of family pledge mortgage. Under this model, you take advantage of the equity that you have placed into your own home as a form of security. This makes it possible for the family member to buy property of their own.

When somebody takes out a loan with a deposit smaller than 20% of the value of the home, the borrower is usually required to pay for lender’s insurance. The cost of lender’s insurance can be very high, and dramatically reduces the amount of funds available each month for other purposes.

If a borrower has a small deposit, or no deposit at all, a family member can dramatically improve the situation by making a family pledge. In this case, the borrower only applies for an 80% mortgage for the new home. The family member then secures the rest of the value of the home using the equity in their own property.

This process has several benefits. First of all, it is much simpler for the bank to approve the application. This is because the bank only needs to approve the loan internally. It does not need to contact their lender insurer to see if they also approve the loan. The monthly costs are also much lower, since the borrower is not required to pay for this insurance.

In most cases, the person making the pledge will only be responsible for the 20%. They typically are not held liable for the rest of the loan, so the risks are relatively low for them.

It is also worth pointing out that there is no reason that the equity has to come from a family home, although this is the most common type of pledge. It could also be an investment property. All that matters is that the property is owned by the person making the pledge.

A family pledge can be removed when the remaining principle of the loan is less than 80%. This can be because the value of the property increased, because this part of the balance was paid off, or both.

Income Support

This type of pledge is less common because it requires the person who is making the pledge to make themselves liable for the entire amount of the loan. If the borrower’s income is not high enough for the lender to offer them a loan, you can pledge that you will provide your own income to help pay for the loan if necessary. The downside of this is that if they fail to make payments on the loan, you are held 100% liable to make the payments.

While this is significantly different from equity support, both types of pledge can be made at the same time. Equity support can be used to cover the deposit, while income support can be used to increase the overall size of the loan.

An income support pledge can be removed once the other borrower can demonstrate that they are earning enough income to pay for the loan on their own.

Learn more about family pledge mortgages.

How can you buy a home without a deposit? In a post-GFC world there are no loans available that will allow you to borrow 100% of the purchase price without providing additional security. In the past it was possible to obtain loans for up to 106% of the purchase price through lenders such as First Permanent, who did not require any additional security for their loans.

In modern times, the only loans that can allow you to borrow 100% are known as guarantor home loans. There are several different types of guarantees, however the most common is known as a family pledge home loan where your parents offer their home as additional security for your loan.

This isn’t as risky as it sounds! The guarantee can be limited to just 25% or less of the loan amount. You can apply for income protection insurance and life insurance to reduce the risk that you will be unable to make the loan repayments. You can also avoid borrowing to your limit which will enable you to have enough spare funds to make additional repayments, and so clear the guarantee as quickly as possible.

What are the benefits for you of using a family pledge mortgage? Firstly you can borrow 100% of the purchase price, or even a little more to cover costs such as stamp duty & solicitors fees. Secondly the approval criteria is less stringent because the lender has more security for their loan. Thirdly you will not be required to pay for expensive Lenders Mortgage Insurance (LMI).

What are the risks to you and the guarantor? The main risk is that if you are unable to make the payments on your home loan then the lender may ask the guarantor to make the repayments for you or may call in the guarantee. In the worst case scenario the lender will try to sell the borrower’s property before trying to sell the guarantors.

We see the main complication of family pledge home loans is generally not when the borrower cannot make the repayments, as this is very rare. The main complication is when the guarantor and borrower have a falling out and the guarantee is required to be removed. In these cases the borrower can apply to remove the guarantee and if they owe over 80% of the property value then they may be required to pay LMI.

Several lenders such as St George Bank, CBA, ANZ, Westpac & NAB all offer this type of loan product. However only St George calls theirs a “family pledge home loan”, the others refer to their loan using different names such as family equity, fast track or deposit kickstart.

Always borrow responsibly and seek legal & financial advice before applying for any type of loan with a guarantee involved.