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.