What are Guarantor Mortgages?
Guarantor Mortgages are a facility that can allow the borrower to lend over 80% of the property value. Nowadays banks require of the borrower a 20% deposit of the property value to avoid having to take out Lender’s Mortgage Insurance (LMI). This Insurance is expensive and can add thousand of dollars to the cost of purchasing your home. It is important to try and minimise this cost or have sufficient available funds to eliminate it altogether. This is where a guarantor is required.
The role of the Guarantor
The guarantor is a person who puts up security for the required supplementary borrowing above the 80% threshold. Traditionally they are parents but could be siblings or friends. It is usual that the guarantor has a property and or a mortgage on a property that they can use as security for the balance of the borrowing. In a simple example you want to buy a property that costs $500,000. The bank says that you will need to make a deposit of $100,000 to avoid paying LMI. Unless you have saved up for a very long time the likelihood is that you don’t have that amount of savings. Instead the guarantor’s property becomes the security for the $100,000. Now you have the ability to meet the $500,000 price of the property.
Benefits of Guarantor Mortgages
- You are effectively getting a 100% home loan
- You are avoiding huge Lender’s Mortgage Insurance costs
- You could arrange to borrow more than the cost of the property if the guarantor would secure that amount
- You don’t have to use your savings or save up over a long period. You can buy a property far more quickly.
- The property is in your name.
- The guarantor is only responsible for the security value not the value of the property
If the guarantor is not prepared or able to secure the full 20% then you either need to access the balance from another loan source or you will be liable for LMI for the balance. You can get 5% deposit mortgages but these will require LMI
Things to think about
- You need to be sure about these guarantor arrangements and talk the issue through with your guarantor.
- Both parties should seek independent legal and financial advise.
- You should try and eliminate the security requirement as soon as you can thereby minimising the exposure of the guarantor.
- Find out all costs that are associated with Guarantor Mortgages.
If you keep up with your financial commitments and take every step to end the guarantor arrangement as soon as you can this type of borrowing can be a great way of buying your home.
Redilend have specialists to talk you and your guarantor through the required steps to secure Guarantor Mortgages. We will try and minimise the exposure to the guarantor and maximise your borrowing potential.
Do you need a loan quickly?
Are you asset rich but cash poor?
Do you have equity in property and still the bank won’t give you a line of credit?
Whatever the loan is for – We can help!
Guaranteed Approval – Applicant must have equity in real estate in Australia that can be offered as security.