Property affordability is challenging. A strategy many take is to use a guarantor. In this article we discuss the benefits on how it may help.
Please note every strategy has it’s set of advantages and disadvantages. We therefore urge everyone looking to buy a property, particularly when using a guarantor to seek advise first. Many good sources are your accountant, financial planner, lawyer/solicitor or mortgage broker.
What is a Guarantor?
Many lenders will allow a related third party to provide additional security to help a family member buy their own home. The is known as a guarantor. A guarantor isn’t an owner of the property in question. The owner is responsible of paying the loan repayments and property costs. The guarantor is a third party who will guarantee to cover these costs if the owner is unable to do so. A guarantor is responsible for this until the loan is eliminated or if it is agreed upon earlier. The most common method of removing a guarantor from the risks of cover the ongoing costs of an owner is if the property is refinanced due to an increase level of equity or the owner is in a better personal situation to remove them from the pre-existing situation.
Borrowers must be able to service the entire loan on their income. Even if there is a guarantor support their purchase. Essentially the guarantor allows the equity in their own property to be used as additional security. This primary security of the loan will be the borrower’s property, however the bank or lender used to borrow the money from will also apply a mortgage over the guarantor’s property. This provides more comfort to the bank or lender as they have two properties to call upon if the loan falls into arrears with both the owner and guarantor being unable to meet the loan repayments.
Can a guarantor help eliminate Lenders Mortgage Insurance (LMI)
Another benefit of having a guarantor is that the borrower may save thousands of dollars by avoiding Lenders Mortgage Insurance (LMI). LMI is required cost to insure the bank if you are borrowing more than 80% of the property. If the guarantor has equity from their home, it can be used to eliminate LMI.
To learn more about LMI, please read our article, what is LMI?
Not everyone is comfortable being a guarantor
This is quite understandable if you are putting your own home at risk or potentially having to cover someone else’s loan in addition to your own cost of living. Most guarantors are only immediate family members, such as a parent. As the property market has increased it has caused first home buyers a struggle to collect the sufficient deposit to buy. Many parents have been willing to use their own home as additional security to help their child buy their first home. Many young adults enter into a great career with good disposable income, however can’t increase their deposit fast enough to cover the capital growth we see in real estate.
In conclusion, this is a wonderful opportunity to help a loved one buy a property, but it also comes with great risk. We strongly recommend both the owner and guarantor seek legal advice before proceeding with any property purchase.
If you’d like to learn other strategies to buy your first home, please don’t hesitate to contact us now for a free consultation. We welcome the opportunity to help.
While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more, please contact us. We welcome the opportunity to assist you.
Mar 2018
